Economy Matters May-June 2016

1
FOREWORD
MAY-JUN 2016
W
ith Britain deciding to exit the European Union in a historic referendum, the implications
for Britain and global economies are expected to be profound. However, the implications
for India are at best expected to be limited, given the strong fundamentals of the Indian
economy. Sound economic management of the Indian economy has resulted in contraction in the fis-
cal deficit to a reasonable level, a comfortable external position and declining inflation - all of which
make for a solid foundation to withstand the short-term issues that Brexit may create. India’s strong
macro-economic environment and stable, predictable and transparent policy regime would make it an
attractive destination for investors in such a volatile global scenario and thereby spur growth further.
Of course, Indian companies will need to re-engineer their European strategy, as border-free access to
the European market can no longer be taken for granted. Financial market volatility will also have an
impact on Indian businesses.
Domestically, monsoons are progressing slowly but steadily and will most likely cover the entire coun-
try by the end of June. The growth prognosis for 2016-17 hinges heavily on how the monsoons will pan
out, especially after two consecutive years of drought. GDP grew at an impressive rate of 7.6 per cent
in 2015-16. The main impetus behind strong growth last year was the impressive growth of private con-
sumption which is a propitious sign indeed as it signifies that domestic demand drivers are playing a
major role in cushioning GDP. This is particularly crucial at the current juncture when the support from
external demand has waned sharply. We are expecting GDP to grow at around 7.75-8.25 per cent in
2016-17 riding on the crest of strong macro-economic fundamentals, positive business sentiment and
pro-growth monetary and fiscal policy.
The Indian industry is in the midst of a very challenging time. On the one hand the global trading pat-
tern and rules are on the course of major shift in coming years while on the other India is currently fac-
ing one of its worst export slowdown of recent years. Exports declined for the eighteenth consecutive
month in May 2016. Adverse external situation related to weak commodity prices, currency fluctuation
and sluggish growth potential in major export markets have weakened India’s export performance
over the last one year. Going forward, the decision of Britain to exit EU could impact India’s exports
adversely, at least in the short-run.
Chandrajit Banerjee
Director General, CII

5
EXECUTIVE SUMMARY
MAY-JUN 2016
Global Trends
With the citizens of Britain voting in favor of British exit
from the European Union (popularly called as Brexit) in
a referendum held on 23rd
June, 2016, the implications
for Britain and the other global economies including
India are expected to be huge. Reflecting a significant
drop in sentiment as Brexit became a reality, the global
financial market volatility increased manifold. However,
the direct economic impact of Brexit on the rest of the
EU would probably be far smaller than on Britain. Addi-
tionally, the negative implications of Brexit for India are
expected to be minimal. Coming to the latest update
of World Bank’s Global Economic prospects released
in early June 2016, global growth has been pared down
to 2.4 per cent from 2.6 per cent forecasted earlier in
January 2016. The downgrade was mainly underpinned
by slowing growth in advanced economies, weak global
trade, stubbornly low commodity prices and diminish-
ing capital flows. Meanwhile, the US Federal Reserve
maintained status-quo and kept the Fed funds target
range unchanged at 0.25-0.50 per cent in its meeting
held on June 16th
, 2016. The median Fed funds rate for
this year retained the projection of two rate hikes.
Domestic Trends
As per the revised estimates released by the Central
Statistical Organization (CSO), India’s GDP grew at an
estimated 7.6 per cent in FY16 as compared to 7.2 per
cent in the previous fiscal. Also, with this, India has be-
come the fastest growing major economy in the world,
overtaking China. The sectoral data print reveals inter-
esting insights into the data. Even as investment growth
slowed in fiscal 2016, private consumption has emerged
as the bulwark of the economy. Going forward, in the
short-run, growth will receive a boost from the cumu-
lative impact of economic reforms and improved infla-
tionary expectations. Therefore in FY17, CII is projecting
a base case of 7.75-8.25 per cent growth. Meanwhile,
the data released on higher frequency such as index
of industrial production (IIP) contracted by 0.8 per
cent in April 2016 as compared to 0.3 per cent growth
in the previous month mainly on the back of poor per-
formance of manufacturing and capital goods sectors.
In FY17, we expect industrial production to grow at a
higher rate as compared to the previous fiscal on the
back of policy aided domestic upturn and low global
commodity prices.
Corporate Performance
The corporate results at the end of the fourth quarter of
fiscal year 2016 brought a reason for cheer in the form
of rising profitability as the financial performance of In-
dian companies, especially manufacturing sector firms,
improved during the year 2015-16. Our analysis factors
in the financial performance of a balanced panel of 1676
manufacturing companies (excluding oil and gas com-
panies) and 903 service firms extracted from the CMIE’s
Prowess database. In FY16, the bottom-line of the firms
improved to 14.5 per cent on an aggregate basis, as
compared to 1.2 per cent in the year earlier. Manufac-
turing companies registered growth in PAT as high as
17.8 per cent in FY16 as compared to a contraction of 9.3
per cent in the previous year. At the same time, profit-
ability in service firms moderated in FY16. However, in
contrast, in FY16, net sales on an aggregate basis con-
tracted further to the tune of 7.0 per cent, as compared
to a contraction of 0.8 per cent previously. The growth
in net sales on an aggregate basis has been contracting
for the past six quarters straight now. Total expenditure
contracted sharply to 14.2 per cent in FY16 as against a
contraction of 2.5 per cent in the fiscal year 2015, thus
fairly cushioning the severe impact of lower net sales
growth during the year.
Focus of the Month: India’s Trade & Interna-
tional Alliances
Exports have declined for the eighteenth consecutive
month in May 2016 in US dollar terms, albeit the rate
of decline has sharply moderated. Merchandise exports
till now have contracted by an average 14.0 per cent in
the last eighteen months till May 2016. There are both
demand as well as supply-side factors that are nega-
tively impacting India’s export volumes, and strate-
gies to reverse the impact of these factors is the need
of the hour. India’s competitiveness, on both cost and
efficiency of production lags that of China and some
other developing country exporters. Indian companies
require the requisite infrastructure, still sorely lacking
in comparison to its trade competitors, to allow prod-
uct export prices to be globally competitive. Coming
to India’s international trade alliances, since it is not a
party to Transpacific Partnership Pact (TPP) compris-
ing Australia, Brunei Darussalam, Canada, Chile, Japan,
Malaysia, Mexico, New Zealand, Peru, Singapore, Viet-
nam, and the US, it has serious implications for India’s
exports including the textile and clothing sector. Join-
ing TPP can help India’s trade and revitalize its textile &
clothing sector, but accepting WTO plus proposals on
IPR, investment protection, services and state-owned
enterprises (SOE) as envisaged under TPP will not find
favors among either policy makers or India Inc. There
are several options available for India, which are dis-
cussed in detail in this month’s Focus of the Month.

ECONOMY MATTERS 6
GLOBAL TRENDS
Brexit: Implications for Britain and India
W
ith the citizens of Britain voting in favor of
British exit from the European Union (popu-
larly referred to as Brexit) in a referendum
held on 23rd June, 2016, the implications for Britain and
the other global economies including India are expected
to be profound. The contest was a closely fought one,
with 51.9 per cent voting to leave the European Union
(EU) and 48.1 per cent voting to remain a part of the EU.
Reflecting a significant drop in sentiment as Brexit be-
came a reality, the global financial market volatility in-
creased manifold. Markets across the world tanked in
the aftermath of Brexit. Crude oil prices dropped by
more than six per cent on the day the results of the
referendum were announced. S&P 500, the bellwether
index of US slipped by 3.6 per cent, reflecting the sharp
decline in investor confidence triggered by Brexit.
Along with its many other adverse repercussions, the
referendum has also raised the possibilities of referen-
da in other European countries. We bring together the
perceived implications of Brexit on Britain and India.
Implications for Britain
Brexit likely to compound problems for Brit-
ain’s economy
The impact of Brexit is likely to be much more on the
British economy than on the rest of EU, given that ex-
ports from the rest of EU to Britain accounts for only
3 per cent of EU’s GDP while Britain exports to the EU
accounts for 13 per cent of Britain’s GDP. Hence, the im-
pact of Brexit is likely to be significant for Britain’s econ-
omy. The plausible impact has been enumerated below:
1. Economic impact: As per the estimates of British
Treasury, post Brexit, Britain’s GDP is likely to be
6.2 per cent lower than it would otherwise have
been by 2030, an annual cost that would work out
at some £4,300 ($6,000) per household. The Treas-
ury’s numbers are bigger than those in some other
recent studies, but that is mainly because these in-
clude the dynamic effects on productivity.
2. Impact on trade: As a member of EU, British indus-
tries were getting access to the European market to
sell their products under the European free market
system. But now with Brexit, all this could change
and would significantly impact trade prospects of

7
GLOBAL TRENDS
MAY-JUN 2016
and positive ways are as follows:
1. Create Uncertainty about future economic engage-
ments and trade: The Indian companies consider
the UK as a gateway for entry into the European
Union. Presently, due to continued border-free ac-
cess to rest of Europe, Indian exporters send their
goods to branch offices in London from where
these are shipped to different parts of Europe. Post
Brexit, it would not be possible for Indian compa-
nies to leverage the EU markets through branch
offices in London. Brexit would necessitate rework-
ing business plans.
The exit of UK from the European Union would
hence create a considerable amount of uncertainty
for Indian companies, especially those located in
the UK or having significant exposure to that coun-
try. The concerns could range over terms of exit,
nature of future engagement with EU or uncertain-
ty relating to exchange rates and dealing with per-
ceived tariff barriers and taxes when importing into
UK. Client dealing would become more difficult.
However, on the positive side, Brexit may compel
Indian companies to forge new ties with other
countries of EU. This would bear good results in the
long-run. India is already trying to build trade nego-
tiations with Netherlands, France, Germany, and
others, albeit in a small way.
2. Impact on investment: UK has been India’s third
largest foreign direct investor across different sec-
tors during FY16. The uncertainty created by Brexit
could lead to capital flight from UK or cause inves-
tors to adopt a wait and watch approach. This could
adversely affect FDI inflows to India across sectors.
At the same time, India is the second biggest source
of foreign direct investment (FDI) for Britain. With
Brexit, Indian companies may find Britain to be a
less attractive investment destination. In a bid to
not lose out to an attractive source of investment,
the British government could hand out bigger in-
centives in the form of tax breaks, lesser regulation
etc. to Indian companies. If that happens, Indian
companies could expect a deregulated and freer
market in Britain.
With Britain being out of EU, India’s FTA negotia-
tions with the EU would have to be reworked. India
would have to negotiate fresh agreement with the
Britain. With Britain withdrawing from EU, it will sig-
nificantly narrow its export market. Moreover, the
imposition of import duty on export material from
Britain will further have a detrimental impact on its
export growth.
Britain would now need to look into markets like
India and China and other emerging economies for
trade. However, in the best-case scenario, Britain
may be able to negotiate access to the European
market that isn’t that different from what it has
now. A case in point being Norway which is not a
member of the EU, but it has agreed to abide by a
number of EU rules in exchange for favorable ac-
cess to the European Common Market.
3. Problems for the Pound: The pound plunged to a
30-year low against the dollar after the results of
the referendum were announced, sliding by a mas-
sive 12 per cent. As the pound loses its value, im-
ports by Britain are set to become more expensive.
This would hurt the already fragile economic pros-
pects of Britain.
4. Hindering free movement of people: Currently
there are about 1.2 million Britons living in other
EU countries, while about 3 million non-British EU
nationals live in Britain. Thanks to EU rules, they
were able to move across the English Channel with
a minimum of paperwork. Britain’s exit from the EU
could change that considerably.
5. Trigger break-up of the UK: Now with Britain on its
way out of the EU, there is a danger that the four
countries which make up the United Kingdom,
namely, England, Wales, Scotland, and Northern
Ireland won’t stay united for very long as well.
Britain has been a strong player in EU. The break-
up would reduce the bargaining power of Europe
when it comes to passing International laws and
treaties which effect Europe.
Impact of Brexit on India
ForIndia,theeconomicimpactofBrexitshouldbesome-
what subdued as compared to other open economies in
Asia. Britain contributes only around 3.4 per cent and
1.4 per cent of India’s exports and imports respectively.
Still, India is not immune, as it is vulnerable to weaken-
ing of business confidence and a potential tightening of
financial conditions. The key channels through which
Brexit could potentially impact India both in negative

ECONOMY MATTERS 8
GLOBAL TRENDS
UK, which may be easier to accomplish at the bilat-
eral level.
3. Impact on IT sector: Brexit is expected to have a
negative impact on the Indian IT sector in the short-
term. In the near term, a likely decline in the value
of the British pound could render many existing
contracts losing propositions unless they are rene-
gotiated. Many Indian IT service firms such as TCS,
Infosys and Wipro have a large footprint in Britain.
The fall in sterling will shrink the sector’s earnings
in Britain. Additionally, the uncertainty surrounding
protracted negotiations on the terms of exit and/or
future engagement with EU could also impact deci-
sion making for large projects.
4. Make Movement of Skilled labour and human capi-
tal Difficult: Skilled labour mobility across EU and
UK would be impacted. This is likely to negatively
impact the Indian industries having their headquar-
ters in Britain as it would lead to scarcity of skilled
labour force. But this could be an opportunity for
skilled workers from India as Britain may relax im-
migration laws for workers coming from emerging
economies like India.
5. Impact on Rupee: There was a fear of a sharp exit of
capital flows following Brexit which was supposed
to be detrimental for the Rupee. It was perceived
that increased volatility in the stock and currency
markets would increase the risks for Indian firms.
However, the impact on the rupee has not been as
much as feared.
Besides, the robust foreign exchange reserves of
over US$360 billion would help deal with volatility
in currency flows, if it happens. The government
is in the position to infuse liquidity to stabilize the
markets. Furthermore, with the flight of capital to
safe avenues, it is looking less likely there will be
an interest rate hike in the US. This will work in Ru-
pee’s favour. However, the currency movements
would need to be closely watched for timely and
suitable intervention.
6. Hasten decline in crude oil prices: On the positive
side, the crude oil decline which occurred after Brit-
ish’s vote to leave EU could be beneficial to India
if it is sustained for a longer duration. Though Brit-
ain is only a small producer of oil with an output of
less than 1 million barrels per day, its position as
one of the largest world economy would mean that
economic slowdown in Britain would send ripples
across the whole world and hence send the crude
oil prices on their southward journey. Thus, being
an oil importer, India stands to gain from a sus-
tained fall in oil prices as it helps it to save on its oil
import bill.
What is more, the strong fundamentals of the Indian
economy- high growth, low inflation, narrow current ac-
count deficit, stable government- would minimize the
adverse impact of Brexit. Similarly, India is among the
ten most preferred destinations for foreign investment,
a position which is unlikely to be impacted by Britain’s
decision to exit from EU. The government’s commit-
ment to reforms has also ignited the ‘feel good’ factor
which would make India an attractive destination for
business.
Thus, even though Britain stands to suffer from leaving
the EU in terms of reduced trade and a sustained drop
in its GDP, the net effect may not turn out to be nega-
tive for India. Given India’s strong cultural and historical
ties with Britain, the loss in the EU free trade market for
the latter could force its policymakers to relax rules in
order to facilitate entry of Indian firms.
According to the latest update of World Bank’s Global
Economic prospects released in early June 2016, global
growth has been pared down to 2.4 per cent from 2.6
per cent forecasted earlier in January 2016. The down-
grade was mainly underpinned by slowing growth in
advanced economies, weak global trade, stubbornly
low commodity prices and diminishing capital flows. In
an environment of anemic growth, the global economy
faces mounting risks, including a further slowdown in
major emerging markets.
One of the key highlights of the report was the mark-
edly different prospects for commodity exporters and
importers. The exporters, crushed by tumbling prices of
oil and other commodities, collectively grew just 0.2 per
cent last year and are expected to expand 0.4 per cent
World Bank Pares Global Growth Forecast

9
GLOBAL TRENDS
MAY-JUN 2016
US Jobs Data Surprises Sharply on the Downside
in 2016. The importers, which benefit from lower raw
materials prices, are still growing at healthy rates — 5.9
per cent last year and a predicted 5.8 per cent this year
Key highlights of the update are enumer-
ated below:
• Advanced economies are projected to grow 1.7 per
cent in the current year, below the Bank’s 2.2 per
cent forecast in January. World Bank estimates the
U.S economy will grow by 1.9 per cent this year,
well below the 2.7 per cent forecast in January. The
euro area economy is expected to expand by 1.6
per cent, just 0.1 per cent below the January esti-
mate.
• The Bank expects developing and emerging mar-
ket economies as a group to grow 3.5 per cent this
year, down from the 4.1 per cent it forecast in Janu-
ary and has barely changed from last year’s 3.4 per
cent.
• Among major emerging market economies, China is
estimated to grow at 6.7 per cent in 2016 after re-
cording 6.9 per cent growth last year. India’s robust
economic expansion is expected to hold steady at
7.6 per cent while Brazil and Russia are projected to
plunge into deeper recession than forecast in Janu-
ary.
• Latin America and the Caribbean region is fore-
cast to contract by 1.3 per cent in 2016 after a 0.7
per cent decline in 2015, the first two back-to-back
years of recession in more than 30 years. It is pro-
jected to begin expanding again in 2017, gradually
gaining momentum to around 2 per cent in 2018.
• Growth in Middle East and North Africa is forecast
to pick up slightly to 2.9 per cent in 2016, 1.1 percent-
age points less than that expected in the January
outlook. The downward revision comes as oil prices
are expected to track lower for the year, at an aver-
age of US$41 per barrel.
• Growth in South Asia is forecast to accelerate to
7.1 per cent in 2016, despite weaker-than-expected
growth in advanced economies, which has damp-
ened export growth in the region. Activity has re-
mained resilient as domestic demand, the main
driver of growth, remained robust.
• Growth in the East Asia and Pacific region is pro-
jected to slow to an unrevised 6.3 per cent in 2016.
This outlook assumes an orderly growth slowdown
in China accompanied by steady progress on struc-
tural reforms and appropriate policy stimulus as
needed.
• Growth in Sub-Saharan Africa is forecast to slow
down in 2016 to 2.5 per cent, down from an estimat-
ed 3.0 per cent in 2015, as commodity prices are ex-
pected to remain low, global activity is anticipated
to be weak and financial conditions are tightening.
• Growth in Europe and Central Asia is forecast to
grow at 1.2 per cent in 2016, a 0.4 percentage point
downward revision from the January outlook. Geo-
political concerns, including flare-ups of violence
in eastern Ukraine and the Caucasus and terror at-
tacks in Turkey, weigh on the outlook.
US non-farm payrolls (NFP) came in sharply lower than
expected, increasing by only 38,000 in May 2016. While
employment increased in health care, mining continued
to lose jobs, and employment in information services
sector decreased due to a strike by Verizon employees.
The NFP print now stands at its lowest level since Octo-
ber 2010. In its policy meeting held in the month of June
2016, Federal Reserve Bank acknowledged the slowing
pace of improvement in the labour market in the wake
of the disappointing non-farm payrolls data for May
2016. However, the Committee continued to expect the
gradual strengthening of labour market indicators go-
ing forward.

ECONOMY MATTERS 10
GLOBAL TRENDS
Private sector prove to be the key laggard
A break up of the NFP data reveals that private payrolls
declined sharply from 130,000 in April 2016 to 25,000 in
May 2016, thereby trimming 105,000 off the headline
print. Within this sector, private service-providing seg-
ment came in 83,000 lower than the April 2016 print
with professional and business services leading the
losses. However, job gains in education and healthcare
provided some cushion. Manufacturing sector recorded
job losses to the tune of 10,000 on the back of sluggish
durable goods sector employment. In contrast, the
Government sector added 13,000 jobs this month.
In contrast to the lower-than-expected addition to non-
farm payroll in May, according to the household survey
data, the seasonally adjusted unemployment rate in
May 2016 decelerated to 4.7 per cent from 5.0 per cent
previously and labour force participation rate fell from
62.8 per cent to 62.6 per cent. Consequently, the de-
cline in unemployment rate is likely to mirror the people
leaving the labour force.

11
GLOBAL TRENDS
MAY-JUN 2016
Hence, Federal Reserve maintains status-
quo in its June 16th
meeting
Given, the concerns emanating from the job market,
US Federal Reserve maintained status-quo and kept the
Fed funds target range unchanged at 0.25-0.50 per cent
in its meeting held on June 16th
, 2016. The median Fed
funds rate for this year retained the projection of two
rate hikes. Moreover, the policy statement lowered the
GDP projection for 2016 and 2017 to its long term tar-
get level of 2 per cent, despite stating that growth in
economic activity “appears to have picked up”. The Fed
added that while household spending and the housing
sector have strengthened, business fixed investment
has remained subdued. Going forward, the policy has
kept the window open for a July 2016 rate hike, contin-
gent on incoming data.
ECB leaves its GDP projections unchanged
for 2017 & 2018
ECB’s economists left their growth predictions for 2017
and 2018 unchanged at 1.7 per cent for both years. To
be sure, the first quarter 2016 GDP growth in Euro Area
came at 1.5 per cent as compared with 1.3 per cent in
the same quarter last year. President Draghi of ECB
remarked that while downside risks to the outlook
persist from global headwinds, balance of risk seem
to have improved slightly in light of ECB’s monetary
policy stimulus.
Inflation forecast faces upside risks
President Draghi pointed out that inflation is expect-
ed to remain sticky at negative levels in the coming
months before picking up in the second half of the
year. The European Central Bank’s charter defines its
main job as keeping inflation below 2 per cent, but not
too far below it. Hence, President Draghi also added
that the Central Bank stands ready to act further by
using all tools available within its mandate, if inflation
fails to pick up. Inflation in the Euro zone was minus
0.1 per cent in May 2016, according to an official esti-
mates, still far from the bank’s official target of 2 per
cent. But a 1 per cent increase in the price of services
in May 2016, as well as a turnaround in oil prices that
has pushed oil to near US$50 a barrel from around half
that in January, signal that overall inflation could rise
in months to come.
Immediate risks arises from Brexit
The Euro zone economy is recovering, but slowly and
unevenly. The unemployment rate remains above 10
per cent and is falling only gradually. With UK voting
for leaving European Union after the crucial voting
which took place on 23rd
June, 2016, the uncertainties
have risen for Euro zone economy. There are several
repercussions of Brexit which will have an impact on
the growth prospects of Britain and Euro zone as a
whole as well, going forward.

ECONOMY MATTERS 12
DOMESTIC TRENDS
Two Years of the Modi Government: Achieve-
ments on Policy Reform and the Way Forward
T
he Modi Government has brought in multi-di-
mensional reforms in its first two years that will
have a long-lasting impact on the country. These
include pro-active measures to restore demand, revive
the investment cycle and to undertake structural re-
forms that will give positive returns in the medium to
long term.
As a result, since the present government assumed of-
fice, major macro-economic indicators are showing pos-
itive trends. For one, GDP growth has picked up steadily
from 6.6 per cent in 2013-14 to 7.6 per cent in 2015-16
and is expected to increase further in the current year.
At the same time, inflation has declined, fiscal consoli-
dation is on track, current account deficit has narrowed,
exchange rate is stable and foreign investment is once
again coming back to India with renewed zeal.
Hence, at a time when the global economy is facing
headwinds,Indiacontinuestostandtallhavingemerged
as the world’s fastest growing economy in 2016. A lot of
this could be attributed to the orderly management of
the economy spurred by conducive policies across mul-
tiple sectors. It is quite apparent that a new growth nar-
rative has been scripted for the country.
Some key initiatives
The launch of fresh initiatives by the government like
Make in India, Skill India and Digital India to revive in-
vestments and manufacturing has done much to im-
prove business confidence and add to the dynamism in
the economy. The credo of development through good
governance, with a focus on execution, has struck the
right chord and the results have been uplifting.
Some of the key reform initiatives announced by the

13
DOMESTIC TRENDS
MAY-JUN 2016
government such as opening up of foreign investment
in multiple segments, procedural reforms to improve
the business climate, revamping tax administration,
streamlining dispute resolution system, making tax re-
gime more friendly and so forth would go a long way to
reduce transactions costs of business.
The current Government has identified ‘Ease of Doing
Business’ as a very critical subject and has, in the last
two years, taken a range of pro-reform initiatives to
ease procedures by simplifying rules and incentivizing
states to become key champions. As a result of actions
by the government, our country has moved up 12 notch-
es in the World Bank’s Doing Business Rankings –from
142 to 130 among 189 countries- according to the World
Bank’s ‘Doing Business 2015’ report. The improvement
in rankings by 12 places is in the correct direction, given
that large economies do not move more than 10 places
in rankings in one year. Similarly, industry has gained
by simplification and rationalization of rules and proce-
dures in terms of time and cost. It now takes fewer days
and lesser number of procedures to start a business, get
power connection, gain access to credit, among others.
Trade procedures have been simplified for faster clear-
ance at the border. The decision to phase out Foreign
Investment Promotion Board (FIPB) which obviates the
need for board approval, would simplify the process of
foreign investments in the country.
Reforms are also happening among states to attract
foreign and Indian capital in the state in the spirit of
cooperative and competitive federalism. Some states
such as Rajasthan and Gujarat are also taking a lead
in initiating policies such as reforming labour laws and
making changes in land acquisition rules to attract in-
vestment. What is notable is that both the central and
state governments are acting in tandem to address the
concerns of industry and take remedial action.
The RBI, through its policy of monetary easing wherein
it has reduced repo rates by 150 bps since January last
year, is also walking in step with the government to pro-
mote investment and growth.
The passage of the Bankruptcy code in Parliament is
a testimony to its commitment to plug the crucial gap
in India’s regulatory architecture and pave the way for
companies to free up investible resources locked up in
sub-optimal projects. The passage of Real Estate Regu-
lation Act will go a long way in bringing transparency to
the real estate market, protecting buyers and promot-
ing honest and healthy practices.
The government has renewed its focus on infrastruc-
ture development by enhancing resource allocation
particularly for national highways, roads, railway sta-
tions, airports and seaports. In fact, road construction
is progressing well with a rapid acceleration in length of
roads and highways being built.
The infusion of public funds in infrastructure will help
unleash economic activity in these sectors with econ-
omy-wide implications. In addition, the renewed em-
phasis on infrastructure development in rural areas
including roads and irrigation facilities, will help reduce
stresses on the agricultural front in the country.
The work done by the government in the direction of
fiscal consolidation, rationalisation and better targeting
of subsidies would help in building efficiency and take
the country to the path of inclusive and sustainable
growth.
Programmes like Aadhar, Jan Dhan Yojana, PAHAL,
Pradhan Mantri Ujjwala Yojana, Mudra Bank, Stand up
India, Crop Insurance Scheme and Skill India are steps
in the direction of improving the quality of life of the
common man, and would go a long way in ensuring the
delivery of benefits to a larger percentage of the popu-
lation. Gram Jyoti is aimed at putting in place the requi-
site infrastructure to electrify every single village in the
country.
The way forward
Notwithstanding the above, while the Government has
carried out several path-breaking reforms to power
growth in the economy, some crucial reforms and policy
interventions remain unfulfilled. Early implementation
of these reform measures are important for attaining
higher levels of productivity and competitiveness and

ECONOMY MATTERS 14
DOMESTIC TRENDS
thereby take the country to a higher orbit of growth.
For re-energising growth, it is crucial to rejuvenate in-
vestment demand which is still tepid and is coming in
the way of capacity creation. To kick-start the virtuous
cycle of investment and growth, capital expenditure
on key infrastructure projects such as roads, railways,
irrigation and power could be further increased. With
private investors weighed down by debt overhang and
banks remaining risk averse, public spending can ‘crowd
in’ private investment.
In fact, continuous action on infrastructure invest-
ments, improving our connectivity through better roads
and highways, rail networks and ports, uninterrupted
power supply and communications network would go
a long way to attract domestic and foreign investment
on a sustained basis. These are the areas where other
developing nations such as China are ahead of us and as
a result are more competitive.
The government also needs to address the problem of
burgeoning non-performing assets (NPAs) of banks.
Measures are needed to remove the NPAs from the bal-
ance sheets of banks and also focus on rehabilitation,
recapitalization and refinancing of banks.
Industry is hopeful that the government would work
more strongly towards building a political consensus so
that the GST Bill is passed in Rajya Sabha. GST is a land-
mark reform which will lead to single market for India,
reduce transactions costs of business and add up to 1.5
per cent to GDP growth. It will give the necessary fillip
to most of the industry sectors of the economy and the
States as well.
For expenditure control, subsidies on food, fertiliz-
ers, electricity will need to be examined closely and be
linked to implementation of direct benefit transfer. Fer-
tiliser subsidy should be paid directly to farmers as cash
transfers to ensure better targeting.
It is important to meet the target laid out for public sec-
tor disinvestment, encourage privatization of loss mak-
ing units and monetize unutilized land available with
PSUs. The resources raised could be used to finance
infrastructure. Such a policy has been successfully im-
plemented in countries such as USA, France, Canada,
China, among others.
For further improvement in business confidence, there
is need to clarify the roadmap to bring down the cor-
porate tax rate and phasing out of incentives, as an-
nounced by the Finance Minister. The government
should ensure that this does not raise the effective tax
rate for industry.
At the same time, procedures should be further simpli-
fied and streamlined to facilitate ease of doing busi-
ness. In fact with most big ticket reforms having been
implemented by the Central government, it is critical
that the State Governments are aligned and reforms
implemented at the ground level. We believe that the
NITI Ayog can play a crucial role in facilitating this exer-
cise as it brings the necessary expertise. Timely enforce-
ment of contracts, establishment of commercial courts
to settle disputes expeditiously and widespread use of
e-governance are essential.
To conclude, the government has in the past two years
taken exceptional and path-breaking measures to re-
kindle the investment cycle, take the economy towards
a trajectory of inclusive growth. The relentless focus
of the government to infuse more competition in the
marketplace, facilitate ease of doing business and un-
dertake measures to improve the quality of life of the
underprivileged is noteworthy. Industry is ready to
partner with the government at each stage and ensure
that it is a win-win situation. By taking actions in the
non-legislative and executive space, India can realise its
potential of emerging as a front-ranking economy in the
comity of nations.

15
DOMESTIC TRENDS
MAY-JUN 2016
GDP Grows at an Impressive Rate of 7.6% in FY16
As per the revised estimates released by the Central Sta-
tistical Organization (CSO), India’s GDP grew as estimat-
ed, at 7.6 per cent in FY16 as compared to 7.2 per cent in
the previous fiscal. The final numbers were in line with
the advance estimates released by CSO earlier during
the year. Also, with this, India has become the fastest
growing major economy in the world, overtaking China.
The sectoral data print reveals interesting insights into
Impressive growth in manufacturing pow-
ers industrial GDP
On the supply-side, on a quarterly basis, GVA growth
at basic prices, for the fourth quarter of the last fiscal
rose to 7.4 per cent as compared to 6.9 per cent in the
third quarter. Agriculture growth moved into the posi-
tive territory, posting a growth of 2.3 per cent in the
4QFY16 after contracting in the previous quarter. For
full year FY16, agriculture sector grew at 1.2 per cent
as compared with -0.2 per cent in FY15. Strong growth
in agriculture is also expected to continue in FY17 pro-
vided monsoons are normal. This will also support the
rural sector and provide a further fillip to consumption
demand as well. On the brighter side, manufacturing
the data. Even as investment growth slowed in fiscal
2016, private consumption has emerged as the bulwark
of the economy.
Gross value added (GVA) growth at basic prices came in
at 7.2 per cent for FY16, a tad higher than 7.1 per cent of
the previous year. Pay Commission pay-outs, contained
inflation, and easy monetary conditions are expected to
support demand, going forward.
growth came in at a robust 9.3 per cent in 4QFY16, al-
beit, lower than the robust 11.5 per cent posted in the
3QFY16, thus taking full year FY16 growth to an impres-
sive 9.3 per cent (vis-à-vis 5.5 per cent growth in FY15).
Growth in mining and quarrying was at 7.4 per cent for
FY16, down from 10.8 per cent in FY15, taking overall
industrial growth to 7.4 per cent in FY16 from 5.9 per
cent in the previous fiscal. Going forward, lower inter-
est rates and smart recovery in private consumption
expenditure will help drive industrial growth in FY17.
Services sector grew at a slower rate of 8.9 per cent in
the FY16 as compared to 10.3 per cent in the previous
fiscal. This was owing to slower growth in ‘trade, hotels,
transport, communication’ and government services.

ECONOMY MATTERS 16
DOMESTIC TRENDS
CII expects GDP growth between 7.75-8.25%
in FY17
Going forward, in the short-run, growth will receive a
boost from the cumulative impact of economic reforms
and improved inflationary expectations. Therefore in
FY17, CII is projecting a base case of 7.75-8.25 per cent
From the demand side, private consumption
growth was the star performer
At market prices, private consumption expenditure has
not shown signs of any significant distress and showed
a further uptick to 8.3 per cent in 4QFY16 from 8.2 per
cent in the previous quarter. With this, the full year FY16
growth of PFCE came at 7.4 per cent as compared to
6.2 per cent in FY15. Government spending component
growth came lower at 2.2 per cent in FY16 as compared
with 12.8 per cent in the previous fiscal. The subdued
growth, higher than the 7.6 per cent posted in FY16.
However, risks to growth in FY17 remain in the form of -
1) monsoons not panning out as expected, 2) further fall
in exports if global growth remains weak and 3) sharp
reversal of the fall in oil prices.
growth rate posted by the gross fixed capital invest-
ment component was indeed disheartening as for the
economic recovery to gain full momentum, it is impor-
tant for this component to grow at a higher rate. In
the FY16, investment spending moderated sharply to
3.9 per cent as compared to 4.9 per cent growth in the
year before. The external sector continued to remain a
matter of concern as export growth contacted by 5.2
per cent in FY16 from 1.7 per cent in the previous fiscal
mainly on account of a slowdown in global trade flows
and a sharp decline in commodity prices.

17
DOMESTIC TRENDS
MAY-JUN 2016
Outlook
The rise in GDP by 7.6 per cent in FY16 reaffirms the CII prognosis of growth recovery underway. This is a cause for
cheer as this points to a revival of growth impulses which would gather further momentum riding on the crest of
strong macro-economic fundamentals, positive business sentiment and pro-growth monetary and fiscal policy.
Industrial Output Contracts in April 2016
Industrial production growth contracted by 0.8 per
cent in April 2016 as compared to 0.3 per cent growth
in the previous month mainly on the back of poor per-
formance of manufacturing and capital goods sectors.
Manufacturing output contracts for the sec-
ond consecutive month
On the sectoral front, output of manufacturing sector,
which constitutes over 75 per cent of the index, contin-
ued to remain in the negative territory for the second
consecutive month. Manufacturing output contracted
at a rate of 3.1 per cent in April 2016 after declining by
1.0 per cent in March 2016. Meanwhile, a slight pickup
in growth in electricity and mining sectors was seen at
14.6 per cent and 1.4 per cent respectively in April 2016.
Poor performance of capital goods remains
a serious cause of concern
Among the use-based classification, capital goods out-
put, which is a volatile component, continued to re-
main in the negative territory for the sixth consecutive
In FY17, we expect industrial production to grow at a
higher rate as compared to the previous fiscal on the
back of policy aided domestic upturn and low global
commodity prices.
month even while the rate of decline has moderated.
The sector contracted by 24.9 per cent in April 2016 as
compared to -15.3 per cent in the previous month. The
recently announced National Capital Goods Policy 2016
is a bid to rejuvenate the growth process in this belea-
guered sector (for more details on this policy, see Policy
Focus section).
Consumer goods output contracts due to
weakness in non-durables sector
Consumer goods have mostly shown a tepid perfor-
mance essentially on account of weakness in consumer
non-durables. The sector contracted by 1.2 per cent in
April 2016 as compared to growth to the tune of 0.5 per
cent in the previous month. In contrast, consumer du-
rables have been on a strong footing and on a positive

ECONOMY MATTERS 18
DOMESTIC TRENDS
trajectory for eleven months in a row with the April 2016
print at 11.8 per cent. The concerns over non-durable
sector continued to prevail. For the month of April 2016,
the non-durables sector entered deeper into the nega-
tive territory at (-) 9.7 per cent. This is partly reflective
In sharp contrast to industrial performance in April
2016, core sector output registered a robust growth
of 8.5 per cent during the month. This marks the fifth
consecutive month of positive growth in the core sec-
tor industries. The main drivers of core sector growth
were refinery products and electricity both of which
recorded double-digit growth. Among the eight core
of the cumulative effect of two past years of drought
and growing distress in the rural economy. But a favour-
able monsoon prognosis this year augurs well for the
growth of this sector, going forward.
industries, petroleum refinery products performed the
best and grew at 17.9 per cent in April 2016, followed
by electricity production that rose 14.7 per cent. Mean-
while, production of fertiliser and cement eased from
March 2016 but remained robust. The fertiliser sector
grew 7.8 per cent, steel by 6.1 per cent and cement by
4.4 per cent in April 2016.
Source: Office of Economic Advisor

19
DOMESTIC TRENDS
MAY-JUN 2016
Outlook
Growth in industrial production decelerated to -0.8 per cent in April 2016 due to a sharp decline in manufactur-
ing and tepid performance of the mining sector. Although the figures indicate a contraction of industrial output
which is a matter of concern, they are quite contrary to the feedback received from industry which points towards
a distinct recovery in business activity across an increasing number of sectors. Under the circumstances, the con-
traction in industrial output could be attributed to one-off factors like unfavourable base effect which has found a
reflection in the production numbers. Going forward, CII believes that industrial production would pick up pace on
the back of conducive government policies, reform initiatives and favourable monsoon forecast.
Higher Food Prices Fuel Inflationary Pressures
Wholesale Price Index (WPI) based inflation print con-
tinued to remain in positive territory for the second
consecutive month in May 2016 after 17 months of de-
flation. WPI inflation rose to 0.8 per cent in May 2016
Food inflation weighs on both WPI and CPI
In the month of May 2016, a common feature which
underlined the spurt in both WPI and CPI inflation was
the sharp rise in food inflation under both the inflation
heads. CPI-food inflation came in higher at 7.6 per cent
in May 2016 as compared to 6.4 per cent in the previous
month. Amongst food inflation, vegetables inflation
witnessed a sharp rise during the month at 10.8 per cent
as compared to 5.0 per cent in April 2016. WPI primary
food articles too witnessed inflation to the tune of 7.9
from 0.3 per cent posted in April 2016. CPI inflation,
the data print which the Central Bank tracks while tak-
ing its monetary policy decisions, too accelerated to its
21-month high of 5.8 per cent during the month as com-
pared to 5.5 per cent in the previous month.
per cent during May 2016 as compared to 4.2 per cent
witnessed in the last month.
Inflation in WPI-primary articles doubles in
May 2016
Coming to WPI sub-categories, inflation in WPI primary
article prices nearly doubled to 4.5 per cent in May 2016
from 2.3 per cent in the previous month, as mentioned
above, mainly on account of higher food prices. In con-
trast to the increase in inflation in primary food articles,
inflation in non-food category decelerated to 4.5 per

ECONOMY MATTERS 20
DOMESTIC TRENDS
Outlook
Both CPI and WPI indices edged up in May 2016 on the back of higher food prices. CII hopes that the food prices
would ease going forward on account of a spate of reforms undertaken by the present government to address the
supply bottlenecks and the expectation that monsoon would be normal after two consecutive years of drought.
RBI Maintains Status Quo on Policy Rates
Reserve Bank of India (RBI) maintained a status quo and
kept repo rate unchanged at 6.5 per cent in its second
bi-monthly policy meeting held on June 7th
, 2016. The
reverse repo rate and marginal standing facility (MSF)
rate currently stands at 6.0 per cent and 7.0 per cent
respectively. RBI is currently in a wait and watch mode
awaiting further clarity on movement of global crude
oil prices, progress of monsoons and other macroeco-
nomic developments.
cent in the reporting month from 7.1 per cent in April
2016, while minerals category continued to record de-
flation for the 22nd
consecutive month.
Fuel group continues to witness deflation
Deflation in the fuel group stood lower at 6.1 per cent in
May 2016 as compared to -4.8 per cent in the previous
month. The deflationary trend in the group continued
for the 19th
consecutive month. The deceleration in May
2016 was led by mineral oils category. With global crude
oil prices recovering from their lows in recent weeks
due to ongoing political tensions in Venezuela, Libya
and Nigeria, we can expect fuel category to record
some mild inflation in the months to come.
Core inflation is slowly inching up
Inflation in manufactured group increased marginally
to 0.9 per cent in May 2016 from 0.7 per cent posted
in the previous month, driven by higher food prices.
Though inflation in manufactured food products came
down slightly to 7.5 per cent from 8.0 per cent, it still re-
mains high. Non-food manufacturing or core inflation,
which is widely regarded as the proxy for demand-side
pressures in the economy came higher at -0.5 per cent
during the month as compared to -0.8 per cent in April
2016.

21
DOMESTIC TRENDS
MAY-JUN 2016
As per RBI document, domestic demand con-
ditions remain solid
On the growth front, the monetary policy document
was of the view that the domestic conditions for growth
are improving gradually, mainly driven by consumption
demand, which is expected to strengthen with a normal
monsoon and the implementation of the 7th
Pay Com-
mission award. Hence, RBI on a reassessment of bal-
ance of risks, retained the GVA growth projection for
2016-17 at 7.6 per cent with risks evenly balanced.
But, RBI says that upside risks to inflation
evident
On the inflation front, the monetary policy document
was of the view that the inflationary pressures have
started rising again in April 2016 after remaining sub-
dued for two consecutive months to March 2016. Retail
inflation measured by the consumer price index (CPI)
rose more sharply than expected due to a more-than-
seasonal jump in food prices. However, RBI retained its
March 2017 inflation target at around 5 per cent, high-
lighting the upside risks on account of 7th
Pay Commis-
sion and firming global commodity prices (especially
crude). A strong monsoon, continued astute food man-
agement, as well as steady expansion in supply capaci-
ty, especially in services, could help offset these upward
pressures.
Liquidity conditions improve in the system
The policy acknowledged the sharp improvement in
liquidity conditions since the April policy meet (when
the new liquidity regime was adopted). The average
daily liquidity deficit has narrowed to around Rs 1 tril-
lion in May 2016 from Rs 2 trillion in March 2016 owing
to a host of liquidity improving measures announced
by RBI like reducing the minimum daily maintenance of
CRR from 95 per cent of the requirement to 90 per cent,
conducting regular open market operations etc.
Thus, would lead to improvement in mon-
etary transmission
The rate cutting cycle which was initiated by the Central
Bank in January 2015, has seen the policy rate getting
pared by 150 bps. However, the base lending rates of
banks have come down only by about 60 bps. Thus, the
monetary policy transmission has not been that strong
so far. But going forward, a host of policy changes like
the cut in small savings rate, shifting to marginal cost
of funds based lending rate (MCLR) for pricing of loans
etc. are expected to improve the transmission process.
Further easing by RBI cannot be ruled out
Despite upside risks to inflation, RBI maintained that its
monetary policy stance remains accommodative. The
Reserve Bank noted that it will monitor macroeconom-
ic and financial developments for any further scope for
policy action.

ECONOMY MATTERS 22
DOMESTIC TRENDS
CII Reaction
RBI could have given more emphasis to the need to continue the rate cutting cycle. Instead, the RBI has chosen
to rely on the transmission of lower interest rates to borrowers by the banks. At this time when credit demand is
still flat and industry is facing a demand crunch, a rate cut would have done much to restore the investment cycle.
CII is hopeful that RBI will resume the rate cutting cycle and support growth impulses in the economy in the next
monetary policy.
Exports Recovery in Sight
Rate of decline in exports narrows sharply in
May 2016
Merchandise exports posted a marginal fall of 0.8 per
cent in May 2016 to US$22.2 billion as compared to de-
growth to the tune of -21.6 per cent in April 2016, thus
indicating that exports may finally be readying to slip
out of the red territory. To be sure, this is the 18th
con-
secutive month of decline for the country’s exports,
hit by low global demand and falling commodity pric-
es. Non-petroleum exports in May 2016 were valued
at US$20.1 billion, thus posting an increase of 1.01 per
cent on a year-on-year basis. Exports of gems & jewel-
lery, handicrafts, engineering products, chemicals and
marine products rose in May 2016 while exports of
petroleum products, pharmaceuticals, meat, oil-meals
and yarn declined. On a cumulative basis, for the period
April-May 2016, merchandise exports stood at US$42.7
billion, registering a negative growth of 3.7 per cent on
year-on-year basis.
In contrast, imports post a larger decline
during the month
Imports on the other hand posted a decline to the tune
of 13.2 per cent to US$28.4 billion in May 2016 as com-
pared to contraction to the tune of 23.1 per cent in April
2016. Oil imports in May 2016 dipped by 30.5 per cent
to US$5.9 billion. Non-oil imports too fell by 7.1 per cent
to U$22.5 billion during the reporting month. During
April-May FY17, India’s cumulative merchandise imports
stood at US$53.8 billion, thus registering a negative
growth of 18.2 per cent on a year-on-year basis.

23
DOMESTIC TRENDS
MAY-JUN 2016
Current Account Deficit Narrows in FY16 on lower Mer-
chandise Trade Deficit
Current account deficit stood at 1.1% of GDP
in FY16 from 1.3% in FY15
Current account deficit (CAD) narrowed sharply to
US$0.3 billion (0.1 per cent of GDP) in Q4FY16, signifi-
cantly lower than US$7.1 billion (1.3 per cent of GDP) in
Q3FY16 and marginally lower than US$0.7 billion (0.1 per
cent of GDP) in Q4FY15. The contraction in CAD was pri-
marily on account of a lower merchandise trade deficit
(US$24.8 billion) than in Q4 of last year (US$31.6 billion)
and US$34.0 billion in the preceding quarter. With this,
for full year FY16, CAD narrowed to 1.1 per cent of GDP
from 1.3 per cent in FY15 on the back of narrowing of
trade deficit to US$130.1 billion in FY16 from US$144.9
Volatility in global financial markets weighs
on net portfolio flows in FY16
Net capital account, after picking up to US$10.9 billion
in 3QFY16, once again decelerated sharply and stood at
US$3.5 billion in Q4FY16. The main reason for this sharp
moderation in capital account could be attributed to
net portfolio outflows during the quarter. There was
a net outflow to the tune of US$1.5 billion in portfolio
investment in Q4FY16 as against net inflow of US$0.6
billion in the preceding quarter. On an annual basis too,
portfolio investment, recorded a net outflow US$4.5
billion in FY16 as against a net inflow of US$40.9 billion
Merchandise trade deficit stood at US$6.3 billion in May
2016ascomparedtoUS$4.8billioninthepreviousmonth.
Going forward, while improving domestic competitive-
ness through structural reforms is crucial to improve
billion in FY15. While trade deficit remained lower in
FY16, headwinds in terms of lower global demand and
the decline in commodity prices weighed on external
sector performance.
Invisibles related flows were lower in Q4FY16 as com-
pared to the previous quarter. Component wise, net
services receipt moderated on quarterly basis in line
with the muted global trade prospects. Transfer re-
ceipts, which represent remittances by overseas In-
dians, amounted to US$15.0 billion in Q4FY16, slightly
lower as compared to the previous quarter. Going for-
ward there is a risk of lower inflows from Middle East
region amid steep decline in crude prices and economic
slowdown in that part of the world.
in FY15. The global financial market uncertainty, led by
the slowdown in China, steep decline in commodity
prices and the likely trajectory of US Fed rate hikes, has
weighed on the capital flows across EM economies and
India was not immune to the trend.
FDI flows too moderated during the reporting quarter,
thus narrowing the BoP balance to US$3.3 billion in
Q4FY16 as compared to US$4.1 per cent in the preceding
quarter. On an annual basis, in FY16, there was an accre-
tion of US$17.9 billion to foreign exchange reserves (on
a BoP basis) as compared with US$61.4 billion in FY15.
exports performance; we believe that this can only ma-
terialize in the medium-term. In the near-term, a weaker
rupee can act as a catalyst to revive competitiveness.

ECONOMY MATTERS 24
DOMESTIC TRENDS
We expect CAD to come below 1 per cent of GDP in
FY17. The key risk to the outlook is volatility in portfo-
lio related flows and deceleration in remittance relat-
ed inflows. From a longer term perspective, although
the external sector performance remains favorable,
the sustainability of the same is still doubtful. Contin-
ued weakness in exports performance due to global
headwinds is a potential headwind for the sector.

25
CORPORATE PERFORMANCE
Corporate Performance in 2015-16
MAY-JUN 2016
Manufacturing firms register rising profit-
ability in FY16
The corporate results at the end of the fourth quarter
of fiscal year 2016 brought a reasonfor cheer in form
of rising profitability as the financial performance of
Indian companies, especially manufacturing sector
firms,improved during the year 2015-16. Data released
by the Central Statistics Office showed that GDP ex-
panded by 7.6 per cent in 2015-16 as against 7.2 per cent
growth in the previous fiscal. Manufacturing sector,
buoyed by a significant fall in inputs costs following the
collapse of global commodity prices, registered a sharp
pickup in 2015-16, growing at a robust rate of 9.3 per
cent.
The analysis factors in the financial performance of a
balanced panel of 1676 manufacturing companies (ex-
cluding oil and gas companies) and 903 service firms
extracted from the CMIE’s Prowess database.
Bottom-line of firms registers a stellar per-
formance in FY16
In the fiscal year 2016, the bottom-line of the firms im-
proved to 14.5 per cent on an aggregate basis, as com-
pared to 1.2 per cent in the year earlier. Manufacturing
companies registered growth in PAT as high as 17.8 per
cent as compared to a contraction of 9.3 per cent in the
previous year. Profitability in service firms moderated in
FY16. Similar trends were witnessed for operating prof-
its (PBDIT).

ECONOMY MATTERS 26
As far as the quarterly analysis is concerned, profitabil-
ity moved to positive territory in the fourth quarter in all
sectors, after having witnessed contractions in manu-
facturing as well as on aggregate basis in the compara-
ble quarter in 2014-15. Growth in PAT stood at the tune
of 9.4 per cent, on an aggregate basis, in the fourth
quarter of 2015-16, as compared to a contraction of 19.8
In contrast, net sales growth continues to re-
main anemic in FY16
Growth in net sales remained a bit of sore point, even
though falling input costs provided a respite. In the
year 2015-16, net sales on an aggregate basis contract-
ed further to the tune of 7.0 per cent, as compared to
a contraction of 0.8 per cent previously. As far as the
yearly outlook is concerned, in the final quarter of fis-
per cent in the same quarter in FY15. Growth in profits
after tax in the service sector also rose sharply to 28.0
per cent in the January-March quarter of 2016, as com-
pared to 2.0 per cent in 4QFY15. Operating profits too
followed fairly similar trends, and witnessed improve-
ments on all accounts in the fourth quarter of fiscal year
2016.
cal 2016, net sales, though still in the negative territory,
witnessed an improvement over comparable quarter in
fiscal year 2015. The growth in net sales on an aggre-
gate basis has been contracting for the past six quarters
straight now. The low net sales of firms were reflective
of the lack of ample demand in the economy, a scenario
that has been persistent for quite some time now. The
slowing demand in the external markets has been doing
no good either.

27
MAY-JUN 2016
But, contraction in expenditure costs in FY16,
cushions impact of low net sales growth
During the year 2015-16, on an aggregate basis, total ex-
penditure contracted sharply to 14.2 per cent as against
a contraction of 2.5 per cent in the fiscal year 2015. This
was mostly led by a contraction in the cost of services
and raw materials. While expenditure for the manufac-
As far as the quarterly analysis is concerned, amongst
the various components of total expenditure on an ag-
gregate basis, encouragingly, the growth in wages and
salaries moderated to 4.5 per cent in the fourth quarter
of fiscal year2016 as compared to 16.2 per cent recorded
in the corresponding period of 2014-15.This appropriate-
ly mirrors the cost-cutting measures being taken by the
firms. Growth in cost of raw materials contracted to the
turing sector contracted to 15.2 per cent as compared
to a contraction of 3.1 per cent in the same quarter a
year ago, growth in expenditure in the service sector
too dropped to negative territory. The expenditure has
been on a contracting trajectory for six quarters straight
now. This has come as a breather and fairly cushioned
the severe impact of lower net sales growth.
tune of 11.6 per cent, in the fourth quarter of 2015-16 as
against a contraction of 21.5 per cent in the same quar-
ter of 2014-15. Moderation in growth of expenditure
has to some extent mitigated the impact of the current
bout of economic crisis characterized by falling growth
in net sales, and reductions have been able to provide
cushion to the bottom-line of the corporate.

ECONOMY MATTERS 28
Gross margin improves across sectors in
FY16
Our analysis shows that while gross margin improved
across sectors and on an aggregate basis, net margin
moderated only slightly. This was aided by both rising
profitability and falling net sales, with both the numera-
tor and the denominator effect in play. Falling net sales
is still a cause of worry though. For the fourth quarter
in the fiscal year 2016, while the gross margin stood at
Over the past eight quarters, while net sales and ex-
penditure has mostly followed a downward trend, prof-
itability has displayed wide fluctuations. A period of
positive growth has reigned for the past four quarters
which saw PAT growing to as much as 55.2 per cent in
14.3 per cent on an aggregate basis, improvement over
13.6 percent the previous period in year on year terms,
for manufacturing and services, it stood at 12.8 per cent
and 20.8 per cent respectively. On an aggregate basis,
net margin stood at 5.4 per cent in the fourth quarter
of 2015-16, as against 6.0 per cent in the corresponding
quarter of 2015-16.
the third quarter of fiscal year 2016. While decelerat-
ing net sales have been a concern to the industry, the
bottom-line has been displaying healthy trends on the
back of production efficiencies and employment of cost
effective measures being exercised by the firms.

29
POLICY FOCUS
POLICY FOCUS
MAY-JUN 2016
1. National Capital Goods
Policy 2016
In a bid to give the growth of beleaguered capital goods
sector a kick-start, the NDA government approved In-
dia’s first ever National Capital Goods Policy 2016 that
intends to make the country a world-class hub and looks
to create over 21 million additional jobs by 2025. The
Capital Goods (CG) industry is one of the key contribu-
tors to value added manufacturing and is significant for
overall economic development of India. The Prime Min-
ister’s Group constituted under the Chairman of the Na-
tional Manufacturing Competitiveness Council (NMCC)
identified Capital Goods as one of the strategic sectors
for strengthening national capabilities in the long-term.
The growth and development of capital goods is criti-
cal for India to achieve the vision of “Make in India” by
increasing the share of manufacturing to 25 per cent of
gross value added. This in turn will help generate addi-
tional jobs, improve India’s trade balance and increase
domestic self-reliance. The National Policy on Capital
Goods is envisaged to unlock the potential of the prom-
ising sector and establish India as a global manufactur-
ing powerhouse.
The policy proposes a comprehensive policy agenda to
achieve these goals, as summarized below:
• Make in India initiative: To integrate major capital
goods sub-sectors like machine tools, textile ma-
chinery, earthmoving and mining machinery, heavy
electrical equipment, plastic machinery, process
plant equipment, dies, moulds and press tools,
printing and packaging machinery and food pro-
cessing machinery as priority sectors to be envis-
aged under ‘Make in India’ initiative
• To create an enabling scheme as a pilot for ‘Heavy
Industry Export & Market Development Assistance
Scheme (HIEMDA)’ with a view to enhance the
export of Indian made capital goods. This will also
require developing a comprehensive branding plan
for the CG sector with the support of India Brand
Equity Foundation (IBEF).
• Strengthen the existing capital goods scheme: The
policy recommends increasing the budgetary allo-
cation & scope of the present ‘Scheme on Enhance-
ment of Competitiveness of Capital Goods’ which
include setting up of Centers of Excellence, Com-
mon Engineering Facility Centers, Integrated Indus-
Several important policy documents were released in the months of May-June 2016, which we cover in this month’s
Policy Focus section. Our endeavor 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.

ECONOMY MATTERS 30
POLICY FOCUS
trial Infrastructure Park and Technology Acquisition
Fund Programme.
• The policy recommends increasing the scope of the
present ‘Scheme on Enhancement of Competitive-
ness of Capital Goods’ by adding a set of compo-
nents including technology, skills & capacity build-
ing, user promotional activities, green engineering
and energy, advanced manufacturing and cluster
development.
• To launch a Technology Development Fund under
PPP model to fund technology acquisition, transfer
of technology, purchase of IPRs, designs & draw-
ings as well as for commercialization of such tech-
nologies of capital goods.
• To create a ‘Start-up Center for Capital Goods Sec-
tor’ shared by Department of Heavy Industry (DHI)
and CG industry/industry association in 80:20 ratio
to provide an array of technical, business and finan-
cial support resources and services to promising
start-ups in both the manufacturing and services
space. These services should focus on pre-incuba-
tion, incubation and post-incubation phases of a
start-up’s growth to ensure that a robust founda-
tion is established.
• Mandatory Standardization which includes, inter
alia, defining minimum acceptable standards for
the industry and adoption of International Organi-
zation for Standardization (ISO) standards in the
absence of other standards, to institute formal
development program for promoting and framing
Standards with Standards Developing Organiza-
tions (SDOs) including Bureau of Indian Standards
(BIS), international standard bodies, test / research
institutions and concerned industry/ industry asso-
ciations.
• To upgrade development, testing and certifica-
tion infrastructure such as Central Power Research
Institute (CPRI) and set up 10 more CMTI like insti-
tutes to meet the requirements of all sub-sectors of
capital goods.
• Skill development: To develop a comprehensive
skill development plan/scheme with Capital Goods
Skill Council and to upgrade existing training cent-
ers and set up 5 regional State-of-the-Art Greenfield
Centers of Excellence for skill development of CG
sector.
• Cluster approach: To provide schemes for enhanc-
ing competitiveness through a cluster approach,
especially for CG manufacturing SMEs. Thrust to be
on critical components of competitiveness such as
quality management, plant maintenance manage-
ment, energy management, cost management, hu-
man resource management and prevention of cor-
rosion with Government support to the extent of
80 per cent of the cost.
• To modernize the existing capital goods manu-
facturing units, especially SMEs by replacing the
modern, computer controlled and energy efficient
machineries across capital goods sub-sectors, there
is need to create a scheme based on capital subsidy
to promote the manufacturing of quality products.
• Support services: A robust mechanism for report-
ing data of production, export and import for all
capital goods sub-sectors with minimal time lag to
facilitate continuous monitoring of policy effective-
ness and timely actions is proposed.
A monitoring and evaluation mechanism for governing
and ensuring implementation of policy recommenda-
tions is also proposed. This includes an inter-ministerial
committee coordinated by Ministry of Heavy Industries
& Public Enterprises with Secretariat participation to
annually review the progress on policy objectives and
driving coordinated action and a joint implementation
mechanism with State governments.
CII Reaction
CII is committed to support the Government and is delighted to be a partner in the unique initiative of the National
Capital Goods Policy. The Policy is a first for the Indian capital goods sector and can be expected to drive growth
in Manufacturing and enable “Make in India”. The Policy’s thrust on Demand Creation, Technology Depth and Ex-
ports will go a long way to address the challenges and issues that the sector is currently going through.

31
POLICY FOCUS
MAY-JUN 2016
2. National Intellectual Property
Rights Policy
The Union Cabinet has approved the National Intellec-
tual Property Rights (IPR) Policy that will lay the future
roadmap for intellectual property in India. The Policy
recognises the abundance of creative and innovative
energies that flow in India and the need to tap into and
channelise these energies towards a better and bright-
er future for all.
The National IPR Policy is a vision document that aims
to create and exploit synergies between all forms of
intellectual property (IP), concerned statutes and agen-
cies. It sets in place an institutional mechanism for im-
plementation, monitoring and review. It aims to incor-
porate and adapt global best practices to the Indian
scenario. This policy shall weave in the strengths of the
Government, research & development organizations,
educational institutions, corporate entities including
MSMEs, start-ups and other stakeholders in the crea-
tion of an innovation-conducive environment, which
stimulates creativity and innovation across sectors, as
also facilitates a stable, transparent and service-orient-
ed IPR administration in the country.
The broad contours of the National IPR Policy are as
follows:
Vision Statement: An India where creativity and inno-
vation are stimulated by Intellectual Property for the
benefit of all; an India where intellectual property pro-
motes advancement in science and technology, arts
and culture, traditional knowledge and biodiversity re-
sources; an India where knowledge is the main driver
of development, and knowledge owned is transformed
into knowledge shared.
Mission Statement: Stimulate a dynamic, vibrant and
balanced intellectual property rights system in India to:
• foster creativity and innovation and thereby, pro-
mote entrepreneurship and enhance socio-eco-
nomic and cultural development, and
• focus on enhancing access to healthcare, food se-
curity and environmental protection, among other
sectors of vital social, economic and technological
importance.
Objectives:
The Policy lays down the following seven objectives:
i. IPR Awareness: Outreach and Promotion - To cre-
ate public awareness about the economic, social
and cultural benefits of IPRs among all sections of
society.
ii. Generation of IPRs - To stimulate the generation of
IPRs.
iii. Legal and Legislative Framework - To have strong
and effective IPR laws, which balance the interests
of rights owners with larger public interest.
iv. Administration and Management - To modernize
and strengthen service-oriented IPR administra-
tion.
v. Commercialization of IPRs - Get value for IPRs
through commercialization.
vi. Enforcement and Adjudication - To strengthen the
enforcement and adjudicatory mechanisms for
combating IPR infringements.
vii. Human Capital Development - To strengthen and
expand human resources, institutions and capaci-
ties for teaching, training, research and skill build-
ing in IPRs.
These objectives are sought to be achieved through de-
tailed action points. The action by different Ministries/
Departments shall be monitored by DIPP which shall be
the nodal department to coordinate, guide and oversee
implementation and future development of IPRs in In-
dia.
CII Reaction
The Government promises to provide a positive environment for technology transfer and IPR licensing. The IPR
policy will help consolidate efforts of multiple agencies associated with the national IP ecosystem. The policy would
help multiply innovations and entrepreneurship and generate more jobs in newer areas of technology. In addition,
IPR provides a strong framework for the Make in India program. The question will always remain how to achieve
these goals and when would one start seeing the result? The next step is to have an action plan with various meas-
urable milestones and definite timeframe. Without the action plan some of the laudable goals may not be fulfilled.

ECONOMY MATTERS 32
POLICY FOCUS
3. Model GST Law
The long-awaited indirect tax reform, Goods and Servic-
es Tax (GST), made headway as the Empowered Com-
mittee of State Finance Ministers on GST, which met in
Kolkata on 14th
June, 2016 approved a model GST law
with “general consensus” on the issue of dual control
over taxation structure between the Centre and States.
Following are the key highlights of the model GST law
which was approved:
• As per the model integrated GST law (iGST), all on-
line purchases will attract uniform GST, effective
April next year, when passed by Parliament. Viola-
tion of the provisions of the statute will attract a jail
term of up to 5 years and fine.
• Refund claims of upto Rs 5 lakh can be filed without
documentary evidence. A declaration based on the
documentary evidence to suffice for a valid refund
claim.
• Full input tax credit to be available of GST paid on
purchase of capital goods in the first year itself.
Presently a maximum of 50 per cent of the input
tax credit can be availed in the first year under the
Cenvat credit law.
• Stringent provisions with potential to cause undue
harassment to entrepreneurs continue to find their
way into the GST law in respect of access to busi-
ness premises, inspection of goods vehicles carry-
ing the consignment, detention of vehicles, scru-
tiny of returns filed, etc.
• Provisions of Reverse Charge Mechanism, currently
applicable for notified services, have been extend-
ed to supply to goods. Transactions attracting Re-
verse Charge to be specified at the time of presen-
tation of draft law in the Parliament/Legislature.
• The draft model law also provides for constitution
of a National Goods and Services Tax Appellate Tri-
bunal by Centre on the recommendation of the GST
Council. The Tribunal shall be headed by a national
president, with a branch in each state. The state
GST tribunal will be headed by a state President and
consist of Members (Judicial), Members (Technical
– CGST) and Members (Technical – SGST).
• A National GST Settlement Commission to be set up
by the Centre has also been proposed in the draft
law for settlement of cases under the proposed
GST Act. The National Commission chairman will be
a High Court judge and the commission will have
one bench for one or more states.
• The draft law also seeks to establish a Consumer
Welfare Fund, which shall be utilised by the Centre/
state government for the welfare of the consumers
in accordance with such rules as that government
may make in this behalf. A GST compliance rating
has also been proposed for every taxable person.
The score will be based on his/her record of compli-
ance with the provisions of the Act.
Government is hoping to get the Constitution Amend-
ment Bill passed by Parliament in the upcoming Mon-
soon Session. It plans to roll out GST from April 1, 2017
that will subsume excise, service tax and all local levies.
CII Reaction
CII is greatly enthused by the outcome of the meeting of the Empowered Committee of State Finance Ministers
held on 14th
June, 2016 and welcomes the release of the Model Goods & Services Tax (GST) Law. This is indeed a
step forward in implementation of the much awaited GST, and will encourage industry to think that GST may be-
come a reality after the coming Monsoon Session. We look forward to the positive movement and with these initia-
tives, it is expected that implementation of GST with effect from 1st
April 2017 will become a reality. GST is India’s
most significant tax reform in decades. GST, when implemented, is expected to usher in a harmonised national
market of goods and services and shall lead to a simplified, assessee-friendly tax administration system. Once im-
plemented, it will subsume most of the country’s central and state level duties and taxes, thus making the country
a national market and contribute significantly to the growth of the economy.

33
POLICY FOCUS
MAY-JUN 2016
4. National Civil Aviation Policy,
2016
The Union Cabinet chaired by the Prime Minister Shri
Narendra Modi gave its approval for the Civil Aviation
Policy on 15th
June, 2016. This is the first time since In-
dependence that an integrated Civil Aviation Policy has
been brought out by the Ministry of Civil Aviation.
Highlights
• The National Civil Aviation Policy would provide a
thrust to India’s vision to become India’s 3rd largest
civil aviation market by 2022 and largest by 2030.
• The policy envisages domestic ticketing to grow
from 8 crore in 2015 to 30 crore by 2022.
• Airports having scheduled commercial flights to in-
crease from 77 in 2016 to 127 by 2019 as per the new
policy.
• The new policy endeavors to increasecargo vol-
umes by 4 times to 10 million tonnes by 2027.
5. FDI Norms Relaxed in Host of
Sectors
The Union Government has radically liberalized the FDI
regime,withtheobjectiveofprovidingmajorimpetusto
employment and job creation in India. This is the second
major reform after the last radical changes announced
in November 2015. Now most of the sectors would be
under automatic approval route, except a small nega-
tive list. With these changes, India is now the most open
economy in the world for FDI. Lists of changes brought
about in the FDI policy areenumerated below:
- Food Products manufactured/produced in India:
It has now been decided to permit 100 per cent
• The new policy aims to take flying to masses by
enabling Indians to fly at Rs 2,500 per hour under
Regional Connectivity Scheme at unserved airports.
• Flexible and liberalized ‘open skies’ and ‘code share’
agreements in the new policy.
• The new policy aims to give incentives to MRO
(maintenance, repair, and overhaul) sector to de-
velop as hub for South Asia.
• The new policy will ensure availability of quality cer-
tified 3.3 lakh skilled personnel by 2025.
• There will be development of green-field airports
and heliports as per the mandate of the new avia-
tion policy.
• The ease of doing business has been enhanced
through deregulation, simplified procedures and e-
governance as elucidated in the new policy.
• Lastly under the new policy there will be promotion
of ‘Make in India’ in Civil Aviation Sector.
FDI under government approval route for trading,
including through e-commerce, in respect of food
products manufactured or produced in India.
- Defence Sector: Foreign investment beyond 49 per
cent has now been permitted through government
approval route, in cases resulting in access to mod-
ern technology in the country or for other reasons
to be recorded. The condition of access to ‘state-
of-art’ technology in the country has been done
away with. FDI limit for defence sector has also
been made applicable to Manufacturing of Small
Arms and Ammunitions covered under Arms Act
1959.
CII Reaction
CII welcomes the new civil aviation policy that aims to bolster the aviation sector in the country with thrust on re-
gional connectivity, liberalization in open skies regime, abolition of contentious 5/20 rule, promotion of air cargo,
maintenance, repair and operations (MRO) et al. The objective to make air travel affordable for masses and easing
the norms for domestic carriers to operate services abroad have been the highlights of the new policy. We at CII
are pretty hopeful that with the right framework and policies in place, India would be well placed to emerge as the
largest aviation market by 2030.

ECONOMY MATTERS 34
POLICY FOCUS
- Pharmaceutical Sector: With the objective of pro-
moting the development of pharma sector, it has
been decided to permit up to 74 per cent FDI under
automatic route in brownfield pharmaceuticals and
government approval route beyond 74 per cent will
continue.
- Civil Aviation Sector
(i) The extant FDI policy on Airports permits 100
per cent FDI under automatic route in Green-
field Projects and 74 per cent FDI in Brownfield
Projects under automatic route. FDI beyond 74
per cent for Brownfield Projects is under gov-
ernment route.
(ii) With a view to aid in modernization of the ex-
isting airports to establish a high standard and
help ease the pressure on the existing airports,
it has been decided to permit 100 per cent FDI
under automatic route in Brownfield Airport
projects.
- Single Brand Retail Trading: It has now been decid-
ed to relax local sourcing norms up to three years
and a relaxed sourcing regime for another five years
for entities undertaking Single Brand Retail Trading
of products having ‘state-of-art’ and ‘cutting edge’
technology.
- Direct to Home (DTH): Up to 100 per cent FDI
through automatic route has also been permitted
for setting up of uplinking HUBs/Teleports, Mobile
TV, DTH, and cable networks operating at national,
state and district levels, as well as local cable net-
works.
- Animal Husbandry Sector: As per FDI Policy 2016,
FDI in Animal Husbandry (including breeding of
dogs), Pisciculture, Aquaculture and Apiculture is
allowed 100 per cent under Automatic Route under
controlled conditions. It has been decided to do
away with this requirement of ‘controlled condi-
tions’ for FDI in these activities.
- Private Security Agencies: The extant policy per-
mits 49 per cent FDI under government approval
route in Private Security Agencies. FDI up to 49 per
cent is now permitted under automatic route in this
sector and FDI beyond 49 per cent and up to 74 per
cent would be permitted with government approv-
al route.
CII Reaction
CII strongly welcomes the landmark decisions taken on opening up the FDI regime during the meeting chaired by
Hon’ble Prime Minister Shri Narendra Modi held on 20th
June, 2016. CII is of the view that liberalization of the FDI
regulations reflects the Government’s commitment to reforms and openness, and reassures investors that Ease of
Doing Business remains high priority. Taken together, the new FDI rules will attract big new investments across key
sectors such as food processing, defense production, pharmaceuticals and civil aviation, among others, thereby
adding to growth and employment.
Permitting food products manufactured in India to be offered through FDI in trading and e-commerce will help
bring in more investments into the food retail chain and increase production in the organized sector. The condi-
tionality in defence production FDI regarding ‘state of the art’ technology has been done away with, allowing more
defence producers to enter the large Indian defence procurement market. Relaxation of local sourcing norms un-
der Single Brand Retail Trading for advanced technology products would encourage global brands to build up their
participation in the country. Altogether, nine areas have been liberalized by the Government today.These major
decisions affirm that India is open for business from the world, and would contribute greatly to investments and
development of the country.

ECONOMY MATTERS 36
FOCUS OF THE MONTH
India’s Trade & International Alliances
of decline has sharply moderated. Merchandise exports
till now have contracted by an average 14.0 per cent in
the last eighteen months till May 2016. Among non-oil
items, exports of gems & jewellery, chemicals and elec-
tronic goods have recorded improved performance in
the recent months. In contrast, exports of engineering
goods and readymade garments have recorded a fall
for many months now. The fall in crude oil prices led to
lower export realisations from petroleum products.
Analysing India’s Exports
Performance
Exports have now declined for the eighteenth consecu-
tive month in May 2016 in US dollar terms, albeit the rate

37
FOCUS OF THE MONTH
MAY-JUN 2016
Manufacturing exports continue
to lag behind
Export slowdown is definitely a major cause of concern.
While imports too have contracted over the same pe-
riod, their decline has not been as steep as that of ex-
ports, resulting in a widening trade gap, despite a down-
ward shift in overall trade. A micro level analysis shows
that there are many sectors where growth is flagging:
from vehicles, to machinery, to commodity exports. It
also shows that even after many years of reform, India
is still exporting the same products to largely the same
markets. Trade has not seen a lateral or horizontal shift.
The high-value added manufacturing exports from India
have not taken off even though India has several advan-
tages, including engineering skills (process, product,
quality and capital), a growing domestic market, a raw
material base and a large pool of skilled labour. India
has the potential to increase manufacturing exports
manifold, but unfortunately this has not happened yet.
Factors Stifling India’s Exports
There are both demand as well as supply-side factors
that are negatively impacting India’s export volumes,
and strategies to reverse the impact of these factors is
the need of the hour.
Demand-Side Factors
• A large chunk of India’s exports go to OECD coun-
tries, in particular the United States, the EU, and Ja-
pan. However, the continuing impact of the global
financial crisis, as evidenced from the constant
downward revisions in the IMF’s global growth fig-
ures since 2011, means that demand stimulus from
India’s traditional trading partners will remain mut-
ed and may not be able to pull back India’s export
growth.
• Similarly, while South-South trade has continued
to increase as a percentage of global trade, India
cannot hope to counter the depression of demand
from the global North by rebalancing trade rela-
tions with the global South. This is because emerg-
ing markets, in particular the BRICS nations, respon-
sible for a large part of the growth in South-South
trade, are now themselves struggling with the con-
sequences of the global economic slowdown.
Supply-Side Factors
But beyond depressed demand factors, it is really the
supply-side constraints that have impacted India’s abil-
ity to expand trade into newer product and service are-
as. While the Indian government has little or no control
over external demand factors, it can certainly intervene
with policies that aid in easing supply-side constraints,
and this shall be the focus of recommendations aimed
at revitalising India’s exports.
• Internal supply side constraints are actually con-
taining India’s exports growth. India faces crippling
infrastructure shortages, which includes power,
roads, finances etc. For instance, debts of over
Rs 3 trillion at the level of state electricity boards,
the principal purchasers of power, dis-incentivizes
the setting up of new generation capacity.
• Second major constraint relates to surface trans-
port and ports. Export oriented production requires
a significant edifice of infrastructure support, which
is in chronic shortage in India. The inefficiency in lo-
gistics system is raising the cost of exports consid-
erably.
• For instance, in comparison to China or any other
developing country where rail is predominant mode
to carry commercial traffic, Indian commercial trade
still relies on road. The obvious and more efficient
alternative is rail transport. Unlike external factors,
internal constraints can actually be addressed with
necessary policy interventions.
• Another area of concern impeding manufacturing
output is India’s outdated labour laws. These are
coming in the way of enhancing manufacturing.
India’s labour laws make it hazardous for business-
es that face seasonality in their demand to set up
mass production facilities. It cannot retrench a part
of the workforce in accordance with depression of
demand.
• Slow implementation of policies has done more to
dissuade investment than the extant labour laws.
The Government needs to continue its thrust on
addressing challenges in these areas. In a limited
industry survey, some of the identified constraints
included lack of access to credit, inadequate infra-

ECONOMY MATTERS 38
FOCUS OF THE MONTH
structure and high transport costs, low availability
and high cost of inputs, and at time difficult and lim-
ited access to land.
• Another area of concern to many of the country’s
exporters is with respect to non-tariff measures
and procedural obstacles, especially relating to li-
censing, permits to export, inspections, certificates
and taxes.
Focus Areas for Intervention
India’s competitiveness, on both cost and efficiency of
production, lags that of China and some other develop-
ing country exporters. Indian companies require the
requisite infrastructure, still sorely lacking in compari-
son to its trade competitors, to allow product export
prices to be globally competitive.
Further, the cost of capital in India remains too high for
companies to be able to borrow competitively. While
the Reserve Bank has made commendable progress in
inflation targeting, there needs to be a sustained period
of contained inflation for bank rates to come down to
levels where companies feel comfortable accessing
debt for their working capital needs.
Integrating into Global Value Chains (GVCs)
• Alongside enabling infrastructure and cheaper capi-
tal, Indian firms need to understand the changing
dynamics of global trade, and recalibrate their pro-
duction strategies to become a part of Global Value
Chains (GVCs) of production.
Bringing State-Specific Export Strategy
• The Government of India, and in particular the Min-
istry of Commerce and its affiliate bodies, need to
enhance interaction with State Governments, with
a view to building an understanding of the com-
parative advantages states enjoy in the production
of certain goods and services. Every State govern-
ment must be mandated to come out with its own
“Export Strategy” document.
• The central government also needs to educate the
state governments about enhancing Trade Facilita-
tion (TF) infrastructure, while concurrently improv-
ing the ease-of-doing-business norms so that en-
trepreneurs and business can focus on improving
products and services instead of focusing on com-
pliance and administration.
Empowering Export Promotion Agencies
• The Government needs to empower export promo-
tion agencies and industry association in order to
improve prompt information sharing between the
private sector, government ministries and the im-
plementing agencies. Export associations and ex-
port promotion authorities need to enhance use of
information technology to reach a wider exporting
constituency.
‘Make in India’ to Lead the Way
• Flagship schemes such as Make in India are good in
terms of giving industry direction, but they lack the
detailing to enable business to know the steps to
be taken to change course and integrate into global
supply chains. The Make in India scheme should
not just cater to domestic consumption, but look
to integrating into global production chains, which
enhances value-added income from trade, and im-
proves the terms of trade, leading to improved bal-
ance of payments.
• If the avowed objective of the Indian Government
is to increase the share of manufacturing in India’s
economy, then it must clear the decks through ap-
propriate measures for large investments by global
manufacturing companies that currently prefer to
operate in south-east Asia or China.
Boosting Defence Manufacturing & Exports
• As part of the push to increase manufacturing out-
put, the government needs to take substantive
steps towards establishing a strong defence indus-
trial base in the country with world class manufac-
turing capabilities leading to strong export possi-
bilities.
• While the right signals have been sent to industry
with respect to enhanced participation in defence
manufacturing, many areas require continued at-
tention to release capacity and informational bot-
tlenecks that restrict the participation of the pri-
vate sector in defence manufacturing. A particular

39
FOCUS OF THE MONTH
MAY-JUN 2016
challenge is the lack of a diversified and distributed
small-manufacturer base that contributes to the
production of complex defence systems.
• The Government can adopt several best-practices
from across the globe that encourages small and
medium sized corporations to participate in the
production of defence equipment.
Encourage Export Oriented FDI
• In general, companies that look to invest in India of-
ten only eye the large domestic consumption mar-
ket. Policies supporting export-oriented manufac-
turing zones need to be relooked at, with a study
of global best practices as evidenced in China and
elsewhere, so that MNCs look to India as one of the
hubs of global goods production.
• Further, foreign direct investment (FDI) norms can
also be differentiated so as to have schemes that
incentivise investments geared towards generat-
ing exportable goods and services. FDI can also be-
come a channel for technology transfer and knowl-
edge spill-over and it can assist in the structural
transformation within the country.
Conclusion
The ‘Make in India’ policy no doubt has sent signals of
vigour and enthusiasm. The objective has to be to cre-
ate productive jobs for India’s rapidly-expanding work-
force in India’s organized manufacturing sector with
the aim of enhancing exports. The window for growth
through export-led manufacturing is a limited one. In-
dia cannot afford to miss the opportunity presented to
it, as the costs of failure now are greater than ever.
Building productive capacities, market linkages and en-
hancing investment attractiveness in selected sectors
will have a strong impact on the export capacity of In-
dian business and improve the country’s trade balance.
Necessary reforms must be identified, both sector spe-
cific for those identified above, as well as cross-cutting
reforms for all sectors, which will help make Indian ex-
ports competitive.

ECONOMY MATTERS 40
FOCUS OF THE MONTH
Transpacific Trade Pact (TPP): Implications for India’s
Textiles and Clothing Sector
I
ndia is not a party to Transpacific Partnership Pact
(TPP) comprising Australia, Brunei Darussalam, Can-
ada, Chile, Japan, Malaysia, Mexico, New Zealand,
Peru, Singapore, Vietnam, and the US. However, it has
serious implications for India’s textile and clothing sec-
tor.
Textile & clothing sector accounts for roughly 5 per cent
of India’s GDP, 15 per cent of its industrial output and
export earnings and provides livelihood support to 55-
60 million people directly or indirectly. Thus, it would
be pertinent to analyze the effect of TPP on India’s tex-
tile and clothing sectoras the US is the top export des-
tination.
When it comes to export of readymade garments and
made ups, the US alone accounts for 30 per cent of In-
dia’s total exports. TPP will affect textile and clothing
sector of India (and of all non-TPP member countries
like Brazil or China) in two ways:
Firstly, exporters from TPP member countries will get
preferential access in the US market vis-à-vis the export-
ers from non-TPP member countries like India. This will
put India’s garment exports (to the US) at a disadvan-
tage as the US import duties on readymade garments
are quite high with average duty ranges around 7.9 per
cent and duties on some clothing items are as high as 32
per cent as per WTO tariff profile database.
Secondly, a key feature of the TPP – ‘yarn forward rule’
makes it mandatory to source yarn, fabrics and other in-
puts that are used in making clothes from any or a com-
bination of TPP partner countries to avail ‘duty prefer-
ence’ under the proposed trade pact. This is likely to
disrupt well-integrated global and regional supply chain
in textile and clothing.
And that will induce garment manufacturers in the TPP
countries to source their inputs from TPP countries at
the cost of non-TPP countries such as India or China
even if the suppliers in TPP regions are not the least
cost. This will be a clear case of trade diversion i.e. mov-
ing trade away from more efficient producers to less ef-
ficient producers.
Though this rule may be aimed at restricting Chinese
manufacturers of yarn and fabrics to benefit from fur-
ther opening of the lucrative US markets for clothing,
it will create comparative disadvantage for all non-TPP
member countries including India.
Already India’s textile and clothing sector is under se-
vere pressure from slowing demand in key export mar-
kets, and backdoor entry of Chinese goods via Bangla-
desh under SAFTA/DFQF schemes that allows duty free
import of garments from Bangladesh and other least
developed countries such as Myanmar into India. Exclu-
sion of India’s key textile products from US GSP ben-
efits is another obstacle for the sector.
If this was not enough, to comply with its commitments
to WTO, India will soon have to phase out its export
incentives – latest 2018 - as it has already reached per
capita GNP of US$1000 at 1990 prices and India’s textile
products are deemed to have achieved export compe-
tiveness as its global export share has crossed 3.25 per
cent.
Export competitiveness is deemed to be achieved if
a country’s global export share of a specific product
group (defined as a section heading of the ITC-HS) is
3.25 per cent or more in two (consecutive calendar)
years. India’s share in world export of textile and cloth-

Economy Matters May-June 2016

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