Economy Matters, Oct-Nov 2013


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Signals coming out of world’s largest economy, US look propitious. But it’s still early days to reach any decisive conclusion. We cover this in the section on Global Trends in this month’s issue of Economy Matters.

In the section on Domestic Trends, we discuss the trends emanating out of the recent releases on IIP, Inflation, Trade, Currency & Monetary Policy during the month of October-November 2013.

The Sectoral spotlight for this issue is on Pharmaceuticals, which has been growing steadily and playing a major role in the Indian economy.

In the Special Article, we discuss the challenges and prospects, which the Micro, Small & Medium Enterprises (MSMEs) are facing currently.

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Economy Matters, Oct-Nov 2013

  1. 1. ECONOMY MATTERS October-November 2013 Volume 01 No. 10 Micro, Small & Medium Enterprises (MSMEs) : Challenges & Prospects
  2. 2. FOREWORD US economy is recovering faster-than-expected, mirrored by the strong set of GDP numbers printed in the third quarter coupled with improvement in non-farm payrolls (NFP) numbers for October 2013. But the markets have not taken kindly to the steady improvement in US economy as it has raised the prospects of the US Fed embarking upon QE-tapering sooner than previously expected. Capital inflows to emerging economies have weakened as a result, giving rise to sharp depreciation of their currencies against the greenback. However, it must be noted that the GDP number would undergo revisions in the coming months and NFP headline number too, being a volatile series, is prone to substantial revisions. Consequently, more water has to pass through the bridge to reach any decisive conclusion on the durability and speed of economic recovery in the US. But as of now, the signals coming out of the world's largest economy look propitious. On the domestic front, data coming out has not been too encouraging with the exception of robust set of export numbers which have come out in the past few months. Lackluster industrial production for September 2013 proved to be a dampener as they were preceded by healthy core sector growth. Going forward, the data for October and November could see some buoyancy owing to demand pick up during the festive season. Inflation, on the other hand, continues to rise unabated, with October 2013 data print reaching its highest level in the last 8 months, mainly due to higher food prices. This has led to the RBI tightening interest rates by a cumulative 50 basis points in the last couple of months. Robust exports growth provides the only reason for cheer in the otherwise grim scenario. Exports since last 4 months from July to October 2013 have come to positive growth trajectory due to stability in the global market, particularly in our large trading partners like US and Europe. Going forward, robust exports along with moderating imports will help in reining the current account deficit at around 3 per cent of GDP in the current fiscal. Micro, Small & Medium Enterprises (MSMEs) play a pivotal role in the overall industrial economy of the country. MSMEs in India account for over 40 per cent of India's industrial output, exports and employment. However, its contribution to India's GDP is a meager 8.7 per cent. Higher cost of credit, limited access to equity capital, inability to build brands have meant Indian MSMEs are lagging far behind their peers in other emerging and developed economies. Today, as India looks to accelerate its manufacturing growth in order to achieve sustained 8-9 per cent GDP growth and self-sufficiency in a gamut of strategic, industrial and household goods, MSME manufacturing mandates the greater attention of policy makers and industry leaders alike. CII through its various recommendations and initiatives has been at the forefront of driving behind a momentous shift in the growth momentum of the MSMEs. Chandrajit Banerjee Director-General, CII 1 OCTOBER-NOVEMBER 2013
  3. 3. The Confederation of Indian Industry (CII) works to create and sustain an environment conducive to the development of India, partnering industry, Government, and civil society, through advisory and consultative processes. CII is a non-government, not-for-profit, industry-led and industry-managed organization, playing a proactive role in India's development process. Founded over 118 years ago, India's premier business association has over 7100 members, from the private as well as public sectors, including SMEs and MNCs, and an indirect membership of over 90,000 enterprises from around 257 national and regional sectoral industry bodies. CII charts change by working closely with Government on policy issues, interfacing with thought leaders, and enhancing efficiency, competitiveness and business opportunities for industry through a range of specialized services and strategic global linkages. It also provides a platform for consensus-building and networking on key issues. Extending its agenda beyond business, CII assists industry to identify and execute corporate citizenship programmes. Partnerships with civil society organizations carry forward corporate initiatives for integrated and inclusive development across diverse domains including affirmative action, healthcare, education, livelihood, diversity management, skill development, empowerment of women, and water, to name a few. The CII Theme for 2013-14 is Accelerating Economic Growth through Innovation, Transformation, Inclusion and Governance. Towards this, CII advocacy will accord top priority to stepping up the growth trajectory of the nation, while retaining a strong focus on accountability, transparency and measurement in the corporate and social eco-system, building a knowledge economy, and broad-basing development to help deliver the fruits of progress to all. With 63 offices, including 10 Centres of Excellence, in India, and 7 overseas offices in Australia, China, Egypt, France, Singapore, UK, and USA, as well as institutional partnerships with 224 counterpart organizations in 90 countries, CII serves as a reference point for Indian industry and the international business community. ABOUT CII Research The CII Research team regularly tracks economic, political and business developments within India and abroad to comment on the emerging economic scenario for the Indian corporate sector. It tracks policy developments, offers comprehensive analysis of industries and comments on and analyzes the economic climate through its regular publications– Economy Matters, Business Outlook Survey and, Fortnightly Economic Updates. We have in-house expertise in providing the most comprehensive, in-depth, unbiased and incisive analysis and forecasts on the Indian economy and various sectors. CII Research is also well versed and well equipped to offer customized research based consultancy services on any theme. It has been catering to the needs of various stakeholders including industries, business houses and government providing meaningful insights about the prevailing trends, outlook on likely future trends, factors behind these trends, existing government policies and policy recommendations with an objective to help stakeholders in better understanding of the issues at hand. The objective of CII Research is to assist stakeholders in taking more informed and strategic decisions with due focus on the attainment of short term as well as long term goals. For more details and to advertise in our products, write to us at DISCLAIMER Copyright © 2013 by Confederation of Indian Industry (CII), All rights reserved. No part of this publication may be reproduced, stored in, or introduced into a retrieval system, or transmitted in any form or by any means (electronic, mechanical, photocopying, recording or otherwise), without the prior written permission of the copyright owner. CII has made every effort to ensure the accuracy of information presented in this document. However, neither CII nor any of its office bearers or analysts or employees can be held responsible for any financial consequences arising out of the use of information provided herein. However, in case of any discrepancy, error, etc., same may please be brought to the notice of CII for appropriate corrections. Published by Confederation of Indian Industry (CII), The Mantosh Sondhi Centre; 23, Institutional Area, Lodi Road, New Delhi110003 (INDIA), Tel: +91-11-24629994-7, Fax: +91-11-24626149; Email:; Web: ECONOMY MATTERS 2
  4. 4. CONTENT Inside This Issue Executive Summary .................................................................04 Statistics at a Glance ...............................................................06 Micro, Small and Medium Enterprises: Issues & Challenges Global Trends Cover Story 07 Given that the MSME sector accounts for over 40 per cent of India’s industrial output, exports and employment, sustained growth of this sector will have a major bearing on the country’s manufacturing growth. Despite the major contributions of the MSME sector, the sector continues to face certain constraints like timely credit and finance. We discuss the various issues and challenges facing the MSME sector along with elucidating the steps taken by CII to alleviate some of the sector’s problems. Central Banks Remain Cautious Even as Green Shoots of Recovery Become Evident Domestic Trends 12 IIP, Inflation, Trade, Rupee & Monetary Policy Taxation 20 Social Security Agreements and Provident Fund for International Workers Sector in Focus 22 Pharmaceuticals Special Article 26 Micro, Small & Medium Enterprises (MSMEs) : Challenges & Prospects Economy Monitor ................................................................... 35 3 OCTOBER-NOVEMBER 2013
  5. 5. EXECUTIVE SUMMARY plays a major role in the Indian economy. As a highly organised sector, a number of pharmaceutical companies are increasing their operations in India. The Indian pharmaceutical industry (IPM) is currently ranked tenth globally in terms of value and ranked third in volume. It is valued at Rs 720.6 billion in 2013 as against Rs 656.5 billion in 2012. It however experienced a slowdown with its growth going down to 9.8 per cent in 2013 from 16.6 per cent in 2012. The slowdown can be attributed to factors such as announcement of National Pharmaceutical Pricing Policy (NPPP) towards the end of 2012 and the subsequent price corrections leading to a low uptake among the stockists amongst other things. In order to overcome the ill-effects of slowdown, the Department of Pharmaceuticals has prepared a 'Pharma Vision 2020' document for making India one of the leading destinations for end-to-end drug discovery and innovation. Global Trends The Central Banks of the major advanced economies met in October 2013 and gave varied decisions on their policy direction keeping in mind the differential macroeconomic conditions prevailing in each economy. The policy meeting of US held on October 30, 2013 was much anticipated as it was expected to lay down the course of the asset purchase programme of the Federal Reserve. In the meeting, it was decided to maintain the policy rate (US Fed Funds Rate) unchanged at 0.0-0.25 per cent. European Central Bank (ECB) pared the key interest rate in its meeting held on November 07, 2013 further by 25 bps to 0.25 per cent. Meanwhile, The Bank of England (BoE) kept its policy rate unchanged at 0.5 per cent and the quantum of Asset Purchase Facility (APF) was also retained at GBP 375 billion in its policy review meeting held in November 2013. Special Article Domestic Trends The MSME sector has consistently outperformed the industrial sector over the last 5-6 years. The sector grew at an average 11 per cent in the period 2006-11, and recorded an impressive 19.6 per cent growth in 2011-12. Going by this growth trend, industry expects the MSME sector to increase its share of national GDP from the current 17 per cent to 22 per cent by 2020. Given that the MSME sector accounts for over 40 per cent of India's industrial output, exports and employment, sustained growth of this sector will have a major bearing on the country's manufacturing growth. Rapid MSME growth will also spur regional industrialisation as the sector is fairly evenly spread across urban and rural areas. As India looks to accelerate its manufacturing growth in order to achieve sustained 8-9 per cent GDP growth and selfsufficiency in a gamut of strategic, industrial and household goods, MSME manufacturing mandates the greater attention of policy makers and industry leaders alike. While bank credit flow to MSME sector has steadily increased, the sector's credit and finance need gap is still considerably huge. The challenge hereon lies in promoting innovative financing of MSME businesses including manufacturing activities. There have been significant efforts to strengthen the enabling environment for MSME service sector, which have had a positive impact on the sector as a whole. However, challenges in formulating and implementing effective policy continue to impede the growth of MSME service. Sub-optimal performance by manufacturing, particularly the capital goods sector, resulted in lowerthan-expected industrial production growth to 2.0 per cent in September 2013. Going forward, the data for October and November could see some buoyancy owing to demand pick up during the festive season. WPI Inflation on the other hand quickened to 7.0 per cent in October 2013 as compared to 6.5 per cent in the previous month on the back of acceleration witnessed in all its major sub-categories. Combined CPI inflation accelerated to 10.1 per cent in October 2013 as compared to 9.8 per cent in the previous month. Rising food prices have continued to remain the key driver behind the jump in both WPI and CPI inflation in the last few months. Consequently, RBI has been raising interest rates in since September 2013 in response to high inflation. Providing some cheer, exports kept up the pace for the fourth straight month by expanding at 13.5 per cent- a 24 month high in October 2013 as compared to 12.1 per cent in the previous month. This is the fourth straight month of expansion of exports above 10 per cent, lifted by improving global demand and weak Rupee. Sector in Focus: Pharmaceuticals The Indian pharmaceutical industry is a highly knowledge based industry which is growing steadily and ECONOMY MATTERS 4
  6. 6. STATISTICS AT A GLANCE General Government Gross Debt (% of GDP) 2011 2012 2013 E 2014 E Advanced Economies 103.6 107.9 107.7 108.3 United States 99.4 102.7 106.0 107.3 Euro Area 88.2 93.0 95.7 96.1 - Germany 80.4 81.9 80.4 78.1 - France 85.8 90.2 93.5 94.8 - Italy 120.8 127.0 132.3 133.1 - Spain 70.4 85.9 93.7 99.1 Japan 230.3 238.0 243.5 242.3 United Kingdom 84.3 88.8 92.1 95.3 Canada 83.5 85.3 87.1 85.6 Emerging & Developing Economies 36.7 35.5 34.7 33.7 Russia 11.7 12.5 14.1 14.6 China 28.7 26.1 22.9 20.9 India 66.4 66.7 67.2 68.1 ASEAN-5 36.3 37.6 39.2 39.7 Brazil 64.7 68.0 68.3 69.0 South Africa 39.6 42.3 43.0 44.7 General Government Gross Debt (% of GDP) 2011 2012 2013 E 2014 E Advanced Economies -0.1 -0.1 0.1 0.2 United States -2.9 -2.7 -2.7 -2.8 Euro Area 0.7 1.9 2.3 2.5 - Germany 6.2 7.0 6.0 5.7 - France -1.8 -2.2 -1.6 -1.6 - Italy -3.1 -0.7 0.0 0.2 - Spain -3.8 -1.1 1.4 2.6 Japan 2.0 1.0 1.2 1.7 United Kingdom -1.5 -3.8 -2.8 -2.3 Canada -2.8 -3.4 -3.1 -3.1 Emerging & Developing Economies 1.6 1.4 0.8 0.8 Russia 5.1 3.7 2.9 2.3 China 1.9 2.3 2.5 2.7 India -4.2 -4.8 -4.4 -3.8 ASEAN-5 2.6 0.6 -0.1 -0.1 Brazil -2.1 -2.4 -3.4 -3.2 South Africa -3.4 -6.3 -6.1 -6.1 Source: IMF WEO, October 2013 ECONOMY MATTERS Note: E- Estimate 6
  7. 7. GLOBAL TRENDS Central Banks Remain Cautious Even as Green Shoots of Recovery Become Evident longer-run goal, and longer-term inflation expectations continue to be well anchored. In determining how long to maintain a highly accommodative stance of monetary policy, the Committee will also consider other information, including additional measures of labour market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments. When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 per cent. The Fed also maintained the asset purchase program. The Chairman reconfirmed that the Fed would continue to buy longerterm US treasury securities at the rate of US$45 billion/month and the Agency MBS at US$40 billion/month. Besides, the Fed would also maintain its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities and rolling over maturing treasury securities. R ecent meetings of the Central Banks of the major advanced economies resulted in varied decisions on their policy direction keeping in mind the differential macroeconomic conditions prevailing in each economy. The global economy is passing through a double-speed recovery currently, with countries like US, UK and China recording some positive data prints, while Euro Area economies continue to remain in the abyss. The policy meeting of the US Federal Reserve held on October 30, 2013 was much anticipated as it was expected to lay down the course of the asset purchase programme of the central bank. In the meeting, it was decided to maintain the policy rate (US Fed Funds Rate) unchanged at 0.0-0.25 per cent. In particular, the Committee decided to maintain the target range for the federal funds rate and said that it anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6.5 per cent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee's 2 per cent On economic data prints, Fed noted that information since September 2013 policy meeting suggest that economic activity is expanding at a modest pace. More specifically, labor market conditions have shown signs of improvement in recent months but the unemployment rate continues to remain elevated. 7 OCTOBER-NOVEMBER 2013
  8. 8. Further, Fed noted that available data suggest that household spending and business fixed investment advanced, while the recovery in the housing sector has slowed somewhat in the recent months. In a nutshell, Fed was of the view that "the downside risks to the outlook for the economy and the labour market have diminished substantially, though not enough to start tapering its asset purchase program". meeting held on November 07, 2013 further by 25 bps to 0.25 per cent, effective from November 13, 2013. Moreover, the ECB left the interest rate on its deposit facility unchanged at 0.0 per cent, while cutting marginal lending facility rate by 25 bps to 0.75 per cent. Notably, the ECB President re-assured the market that monetary policy will remain accommodative for as long as necessary and re-iterated that "…it (the Governing Council) continues to expect the key ECB interest rates to remain at present or lower levels for an extended period of time…". Moving on to Euro Area, which saw the European Central Bank (ECB) paring the key interest rate in its ECB Cuts Interest Rate in November (%) 1.20 1.00 1.00 0.80 0.60 0.40 0.20 0.25 Nov-13 Sep-13 Jul-13 May-13 Mar-13 Jan-13 Nov-12 Sep-12 Jul-12 May-12 Mar-12 Jan-12 0.00 Source: European Central Bank (ECB) On the growth front, the Central Bank President stated that survey-based confidence indicators up to October were consistent with continued, albeit modest, growth in the second half of the year. Accordingly, output was expected to recover at a slow pace. He also mentioned that the risks surrounding the economic outlook for the Euro Area continued to be on the downside. However, the reassurance from the President that monetary policy would remain accommodative for a long period of time augurs well for the economic prospects of the region and is likely to support growth going forward. November 07, 2013. The recent economic data coming out of UK indicates that the economy continues to remain on a strong footing. According to preliminary estimates, UK real GDP grew 0.8 per cent on q-o-q basis in the third quarter of 2013, as against 0.7 per cent in the previous quarter - with services, construction and manufacturing all expanding. This marks the highest quarterly growth in three years and second best growth in six years. Corroborating the rise in GDP, services PMI also jumped by 2.2 points to 62.5, marking the highest level since May 1997, while construction PMI also rose to a 6-year high in October 2013. UK economy is recovering a faster-than-expected pace, however in order to ensure that the recovery remain durable, BoE needs to keep the interest rates low for some more time. Meanwhile, The Bank of England (BoE) kept its policy rate unchanged at 0.5 per cent and the quantum of Asset Purchase Facility (APF) was also retained at GBP 375 billion in its policy review meeting also held on ECONOMY MATTERS 8
  9. 9. UK GDP Expands at a Faster Pace in 3Q13 q-o-q % 0.7 0.8 0.6 0.4 -0.3 3Q12 4Q12 1Q13 2Q13 3Q13 Source: Office for National Statistics In sum, it is amply clear from the monetary policy stances of the Central Banks of three major economies that the recovery has not yet become ingrained; consequently their stance is still cautious and is likely to remain so in the near future as well. US Economy Springing Up Some Positive Data-Prints There have been a slew of positive data prints coming out of US in the last few quarters. As per the advance estimate, US third quarter 2013 GDP grew faster than expected at an annual rate of 2.8 per cent, higher than the second quarter GDP growth rate of 2.5 per cent. On a year-on-year basis, however, GDP growth remained stable at 1.6 per cent in the third quarter as compared to similar reading in the quarter before. The latest reading of economic growth shows the economy had strengthened in the months leading up to the government shutdown and debt ceiling standoff. The increase in real GDP in the third quarter primarily reflected positive contributions from personal consumption expenditures (PCE), private inventory investment, exports, residential fixed investment, nonresidential fixed investment, and state and local government spending that were partly offset by a negative contribution from federal government spending. Imports, which are a subtraction in the calculation of GDP, increased. 9 OCTOBER-NOVEMBER 2013
  10. 10. US GDP Growth Accelerates 3.1 2.8 2.8 2.5 2.0 1.6 1.6 1.3 1.1 0.1 3Q12 4Q12 1Q13 2Q13 3Q13 y-o-y% Quarter seasonally adjusted at annual rate (%) Source: US Bureau of Economic Analysis (BEA) In more positive news for the economy, non-farm payrolls (NFP) increased by 204K in October 2013, much higher than market expectations of an increase of 120K. However, as per the household survey, the unemployment rate edged higher to 7.3 per cent in October 2013, rising from a four-and-a-half year low of 7.2 per cent seen in September 2013. Meanwhile, total job addition for September was revised up from 148K to 163K, while that for August was also revised up from 193K to 238K. With the latest print and the revisions, the monthly average for 2013 stood at 186K compared to 172K per month average in the corresponding period last year. Jobs growth in the Government sector turned negative in October for the first time in three months, as the economy grappled with a 16-day partial shutdown of the US Government in the first half of the month. Meanwhile, private sector continues to remain the lead contributor to the total job addition. Jobs Growth in US Thousand of Jobs 350 7.9 332 % 87.8 300 238 250 7.6 204 199 176 200 148 172 163 142 150 7.4 7.3 89 100 7 6.8 US NFP Unemployment Rate (RHS) Source: US Bureau of Labour Statistics (BLS) 10 Oct/13 Sep/13 Aug/13 Jul/13 Jun/13 May/13 Apr/13 Mar/13 Feb/13 Jan/13 50 ECONOMY MATTERS 7.2
  11. 11. Other Global Developments During The Month China's v trade surplus widened to US$31.1 billion in October 2013, the highest in 2013, as compared to previous month's print of US$15.2 billion, amidst a sequential drop in imports. Exports growth recovered to 5.6 per cent on y-o-y basis, led by exports to US and Europe. China's v annual inflation climbed to an eight-month high of 3.2 per cent in October 2013 from 3.1 per cent in September 2013 as food costs soared, fanning market worries about policy tightening as factory output and investment data pointed to signs of stabilisation in the economy. One of v the fiercest typhoons ever recorded has devastated central Philippines, leaving entire cities and towns in ruins and as many as 10,000 people dead. After gashing six provinces, Typhoon Haiyan veered to the northwest into the South China Sea, and weakened to a tropical storm near the border of Vietnam and southern China. Indonesia's economy grew at its weakest pace in nearly four years at 5.6 per cent in the third quarter of 2013 as v compared to 5.8 per cent in the previous quarter, throttled by weak exports and slowing consumption as higher fuel prices bite. Vietnam economic growth picked up to 5.5 per cent on y-o-y basis in the third quarter of 2013 as compared to 5.0 v per cent in the previous quarter, as rising exports offset weak domestic demand. Ratings v agency Standard and Poor's cut France's sovereign credit rating to AA from AA plus, citing lack of progress in government reforms of the country's economy. The agency revised the country's sovereign credit outlook up to stable from negative, however. UK headline inflation decelerated from 2.7 per cent in September 2013 to 2.2 per cent in October. Core inflation v also dropped to 1.7 per cent in October, as against 2.2 per cent in the previous month. This is the lowest inflation in the past four years. GDP vrose by 0.1 per cent in the Euro Area (EA17) and by 0.2 per cent in the EU28 during the third quarter of 2013 on q-o-q seasonally-adjusted basis, compared with the previous quarter, according to flash estimates published by Eurostat, the statistical office of the European Union. However, on y-o-y basis, Euro Area growth continued to decline, albeit magnitude of decline reduced in the third quarter. Euro vArea annual inflation was 0.7 per cent in October 2013, down from 1.1 per cent in September. A year earlier the rate was 2.5 per cent. Monthly inflation was -0.1 per cent in October 2013. Euro vzone Industrial Production Index (IPI) excluding construction declined by 0.5 per cent on month-on-month basis in September 2013, as against a growth of 1.0 per cent in August 2013. In y-o-y terms, IPI grew 1.1 per cent (based on data adjusted for working days) in September 2013, as against a decline of 1.1 per cent in August 2013. 11 OCTOBER-NOVEMBER 2013
  12. 12. DOMESTIC TRENDS Industrial Output Recovers, But Falls Short of Expectations sector output and cushioned by a low base of last year too. To be sure, core sector (which contributes around 38 per cent to total IIP) grew by 8.0 per cent in September 2013. Sequential momentum best denoted by seasonally-adjusted month-on-month series also painted a grim picture as it continued to remain in negative territory for the second consecutive month, thus quickly dissipating any signs of a quick turnaround in the industrial production. IIP data for August 2013 was revised down slightly to 0.4 per cent from 0.6 per cent previously. The headline IIP now averages a meagre 0.4 per cent for the first half of this fiscal year. S ub-optimal performance by manufacturing, particularly the capital goods sector, resulted in lower-than-expected industrial production growth at 2.0 per cent in September 2013. Although the data print marked acceleration over the 0.4 per cent growth in August 2013, the September number was disappointing as it was preceded by spectacular performance by core Industrial Production Stood at 2.0% in September 2013 y-o-y% SA m-o-m% 10 5 2.5 2.0 0 Source: CSO & CII calculations ECONOMY MATTERS 12 Sep/13 Jul/13 May/13 Mar/13 Jan/13 Nov/12 Sep/12 Jul/12 May/12 -5
  13. 13. On the use based front, the volatile capital goods sector proved once again to be a dampener as its output contracted by 6.8 per cent in the reporting month as compared to decline of 2.0 per cent in the month before and healthy 15.6 per cent growth in July 2013. The sector's poor performance in the month is worrisome as its output declined on the back of a low base of last year. Notably, industrial production output excluding capital goods sector stood at 3.4 per cent during the month. Capital good output is widely regarded as the pre-cursor for improvement in investment demand. Hence, unless we are able to see any meaningful recovery in capital goods output in the second-half, it will be very difficult to see any discernible improvement in overall growth prospects for the economy. On the sectoral front, manufacturing output, albeit moved into the positive territory in September 2013, but continued to remain weak. The weakness comes off a low base of last year, hence raises pertinent questions about the durability of the recovery process so far. The first-half manufacturing output too remained weak at 0.1 per cent. As per the industry classification, of the 22 industries, 13 showed positive growth, mainly led by wearing apparel and coke & refined petroleum products, while negative growth was seen in sectors such as radio, TV & communication equipment and motor vehicles. Rebound of manufacturing sector output is very critical for aiding the pickup in overall industrial growth. In a pleasant surprise, mining sector which remained in negative territory for 11 consecutive months, plagued by regulatory and environmental issues, moved into the positive territory in September 2013. Mining sector grew by 3.3 per cent as compared to decline of 1.0 per cent in the previous month. Meanwhile, electricity sector continued to remain on a strong footing as it expanded by a robust 12.9 per cent in September 2013 as compared to 7.2 per cent in the previous month. A healthy 5.9 per cent growth in electricity sector in the first-half of the fiscal augurs well for the industrial outlook going forward. The strength in the core index was visible in the basic goods index, which grew 5.4 per cent in September 2013. Consumer goods moved out from the negative territory after a gap of 4 months in September 2013. The sector grew by 0.6 per cent partly helped by a low base of last year. In contrast, consumer durables sector has been languishing in the negative territory for 10 months now, indicating the weakness in consumption growth. Nondurables sector growth on the other hand remained robust as it accelerated to 11.3 per cent as compared to 4.8 per cent in the previous month. The half year average for this component is by far the best among all other sub indices and stands at 7.3 per cent. Sectoral Growth (y-o-y, %) Apr-Sept Weight Sept-12 July-13 Sept-13 FY13 FY14 1000.0 -0.7 2.8 0.4 2.0 0.1 0.4 Manufacturing 755.3 -1.6 3.2 -0.2 0.6 -0.3 0.1 Mining 141.6 2.2 -2.5 -1.0 3.3 -1.1 -2.5 Electricity 103.2 3.9 5.2 7.2 12.9 4.6 5.9 456.8 2.7 1.5 1.1 5.4 2.8 1.2 88.3 -13.3 15.6 -2.0 -6.8 -14.2 -0.7 Intermediates 156.9 1.7 3.1 3.7 4.1 1.2 2.6 Consumer Goods 298.1 0.0 -0.5 -0.9 0.6 2.7 -1.3 -Durables 84.6 -1.5 -8.9 -7.7 -10.8 4.0 -10.9 -Non durables 213.5 1.4 7.0 4.8 11.3 1.6 7.3 General Aug-13 Use-Based Basic Capital Source : CSO 13 OCTOBER-NOVEMBER 2013
  14. 14. Outlook The modest increase in IIP for the month of September is not reason enough for us to conclude that industry has turned the corner and is on a path to recovery. Going forward, the data for October and November could see some buoyancy owing to demand pick up during the festive season. The CCI and the PMG have been pro-active in clearing stalled projects and hopefully, with some of them translating into actual investments on the ground, there would be a fillip to demand. However, to turn incipient signs of progress into a firm recovery, there is a need to address structural issues, which are creating supply side hurdles in the way of growth. Inflation Rises to 8-month High in October 2013 WPI inflation quickened to 7.0 per cent in October 2013 as compared to 6.5 per cent in the previous month on the back of acceleration witnessed in all its major subcategories. Inflation reading for August 2013 was sharply revised to 7.0 per cent from 6.1 per cent. With this the cumulative WPI inflation for the first seven month stands at 5.8 per cent as compared to 7.6 per cent in the same period last year. Surprisingly, the seasonally-adjusted month-on-month series indicated some softening in the underlying trend as the October month's reading stood at 0.4 per cent as compared to 2.0 per cent in the previous month. WPI release was preceded by CPI inflation which also showed sharp uptick as it moved into the double-digits after a gap of 7 months. Combined CPI inflation accelerated to 10.1 per cent in October 2013 as compared to 9.8 per cent in the previous month. Rising food prices have continued to remain the key driver behind the jump in both WPI and CPI inflation in the last few months. In CPI, food inflation surged to an 8-month high of 12.3 per cent due to record high vegetables inflation. Both WPI & CPI Inflation Remain High 12 10.1 10 8.8 8 6 7.0 7.6 4 WPI y-o-y% Oct-13 Aug-13 Jun-13 Apr-13 Feb-13 Dec-12 Oct-12 Aug-12 Jun-12 Apr-12 Feb-12 2 CPI (Combined) y-o-y% Source: Office of Economic Advisor Inflation in primary articles continued to increase to 14.7 per cent in October 2013 as compared to 13.5 per cent in the previous month. This was mainly attributable to the spike in food inflation to 18.2 per cent in the month. Within food, there was a moderation in inflation across sub-components except in inflation in eggs, meat & fish that increased to 17.5 per cent as compared to 13.5 per cent in September 2013. Further, inflation in vegetables slid to 78.4 per cent from previous month's reading of 89.4 per cent. ECONOMY MATTERS Fuel inflation also accelerated to 10.3 per cent in October 2013 as against 10.1 per cent in the previous month. This has been mainly contributed by an increase in non-administered fuel component to 9.9 per cent from 9.0 per cent in the previous month. Going forward, we expect fuel inflation to moderate due to stabilisation witnessed in global crude prices due to the ongoing negotiations between Iran and West and appreciation in the Rupee. 14
  15. 15. Inflation in mManufactured products increased to 2.5 per cent in October 2013 as compared to 2.0 per cent last month. Non-food manufacturing, which is widely regarded as the proxy for demand-side pressures in the economy, too increased to 2.6 per cent during the reporting month as compared to 2.1 per cent last month. This reflects that the sharp Rupee depreciation in the past few months probably led the producers to hike prices in spite of their weak pricing power. Manufacturing food inflation, which consists of processed food products, even though low, accelerated to 1.9 per cent in October 2013 as compared to 1.6 per cent in the previous month. Sectoral Components of Inflation April-Oct Weight Oct-12 Aug-13 Sept-13 Oct-13 FY13 FY14 General 100.0 7.3 7.0 6.5 7.0 7.6 5.8 Primary 20.1 7.8 13.6 13.5 14.7 9.8 10.2 14.3 6.7 19.2 18.4 18.2 9.5 13.3 - Non-Food 4.3 11.4 1.2 5.2 6.8 9.4 5.5 - Minerals 1.5 8.6 2.0 0.0 7.0 12.0 -0.1 14.9 11.6 12.7 10.1 10.3 10.9 9.7 1.1 3.8 3.3 9.6 5.3 9.0 1.5 4.7 14.6 27.8 20.1 14.7 7.0 21.8 65.0 5.9 2.3 2.0 2.5 5.8 2.7 - Food 10.0 9.8 2.4 1.6 1.9 7.8 4.3 - Non-food 55.0 5.2 2.3 2.1 2.6 5.4 2.4 - Food Fuel - Petrol - High Speed Diesel Manufacturing Source: Office of Economic Advisor Outlook The continued rise in both WPI and CPI inflation has raised red flags in the economy. However, one needs to remember that the bulk of the rise in inflation is attributable to jump in primary food inflation, which is generally transient in nature and is expected to cool-off in the next few months, given the positive impact of a good monsoon this year. Under this backdrop, we would urge RBI to cut rates in the policy review, as the economy is in urgent need of fresh stimulus in the form of lower lending rates. Exports Growth Keep Up the Pace, Even as Trade Deficit Widens Exports kept up the pace for the fourth straight month by expanding at 13.5 per cent- a 24 month high in October 2013 as compared to 12.1 per cent in the previous month. This is the fourth straight month of expansion of exports above 10 per cent, lifted by improving global demand and weak Rupee. A weaker Rupee has boosted the competitiveness of Indian exports in the global markets. Cumulative value of exports for the first seven months of the current fiscal (Apr-Oct) were valued at US$179.4 billion as against US$138. 7 billion a year ago, thus registering a year-onyear growth of 6.3 per cent. Reflecting the weak domestic demand and downward trend in non-essential imports, the imports registered their fourth consecutive contraction in October 2013. Imports during October 2013 were valued at US$37.8 15 OCTOBER-NOVEMBER 2013
  16. 16. billion, posting a decline to the tune of 14.5 per cent over the same month last year. Within imports, gold and silver imports remain muted at US$1.4 billion in October 2013 as against import of US$0.8 billion in September 2013. Though gold imports increased marginally in October as compared to the month before, the good thing is that October 2013 gold import is still 80 per cent lower in value terms against the gold import of the same period last year. The lower gold imports during the festive season is encouraging and reflects the fact that government intervention to curb gold imports are bearing results. Meanwhile, crude imports came at 1.7 per cent higher at US$15.2 billion in October 2013 as against US$14.9 billion in corresponding period last year. The higher oil import bill is attributable to the high international oil prices during the month due the ongoing geopolitical tensions in Syria. External Sector Performance (y-o-y%) 30 20 13.5 10 0 -10 -14.5 Exports Oct/13 Aug/13 Jun/13 Apr/13 Feb/13 Dec/12 Oct/12 Aug/12 Jun/12 Feb/12 -30 Apr/12 -20 Imports Source: Ministry of Commerce As the pace of decline of imports waned, without a commensurate rise in exports growth, trade deficit in October 2013 widened to US$10.6 billion as compared to US$6.8 billion in the previous month. On a cumulative basis, trade deficit came in at US$90.7 billion in AprilOctober FY14, lower than a deficit of US$112.0 billion during the same period in FY13. External Sector Snapshot April-October (US$ billion) Oct-12 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 FY13 FY14 Exports 24.0 23.6 25.8 26.1 27.7 27.3 168.7 179.4 Imports 44.7 35.9 38.1 37.1 34.4 37.8 280.7 270.1 Oil Imports 15.8 12.8 12.7 15.1 13.2 15.2 95.0 98.1 Non-Oil Imports 28.9 23.1 25.4 22.0 21.2 22.6 185.8 172 Trade Balance -20.6 -12.3 -12.3 -10.9 -6.8 -10.6 -112.0 -90.7 Source: Ministry of Commerce Outlook The EXIM Trade Data reaffirmed the reversal of negativity. Exports since last 4 months from July to October 2013 have come to positive growth trajectory due to stability in the global market, particularly with our large trading partners like US and Europe. Also, the timely Intervention by the Commerce Ministry in terms of expanding Focus Product and Focus Market Scheme has helped Indian exporters to withstand the vagaries of tough competition. CII strongly recommends restoration of Duty Drawback Rates which were reduced drastically last month. This will further help in gaining and maintaining India's share in global market. ECONOMY MATTERS 16
  17. 17. Rupee Starts to Weaken Again After Staging a Smart Recovery After weakening to its two-month low value of 63.7 per US$ by 13th November 2013, Rupee has regained some of its lost ground and strengthened to 62.4 per US$ by 26th November 2013. Notably, Rupee weakened in midNovember 2013, losing 1.4 per cent since November 8, 2013 when the strong US jobs data was released. The US economy added 204K jobs in October 2013-which pushed up the dollar. This renewed fears that the US Federal Reserve will soon begin ending its US$85 billion a month bond buying programme. However, it's pertinent to note that the Rupee had been losing ground even before that as about a third of the demand for dollars from oil companies was back in the market. To be sure, the dollar demand was being met by RBI through a special window since August 28, 2013 when the currency had hit its lowest ever value of 68.4 per US$. Rupee was trading lower at 62.0-64.0 per US$ in the fourth week of November 2013 as compared to highs of 61.2 per US$ hit in mid-October 2013, losing close to 2.1 per cent. position to counter the current bout of Rupee weakness than it was before. This is thanks to the US$17.5 billion that were collected from the concessional dollar swaps for banks which has resulted in a steep rise in foreign exchange reserves to US$283 billion during the month of October 2013. Rupee has remained highly volatile in the last few months. After it touched its lowest ever value in endAugust 2013, RBI intervened actively in the market apart from announcing a slew of measures to stem the Rupee's downfall. This helped the Rupee to recover smartly from its lows and it appreciated by over 10 per cent between end-August and end-October 2013. However, after traversing the month of October 2013 fairly quietly and remaining largely range-bound, the month of November 2013 saw some sharp volatility. Rupee started the month of November at 61.9 per US$, weakened sharply to 63.7 per US$ by 13th November 2013, only to recover to 62.4 per US$ by 26th November. The experts, however, feel that RBI is in a much better Rupee Weakens in November 2013 68.4 70 68 66 63.6 64 62 61.2 60 58 54.4 56 54 52 12/Nov/13 29/Oct/13 15/Oct/13 01/Oct/13 17/Sep/13 03/Sep/13 20/Aug/13 06/Aug/13 23/Jul/13 09/Jul/13 25/Jun/13 11/Jun/13 28/May/13 30/Apr/13 14/May/13 Source: RBI 16/Apr/13 02/Apr/13 50 Outlook Notwithstanding the current bout of weakness witnessed in the Rupee against the Greenback, we expect the Rupee to remain stable, going forward. The improvement in CAD, robust capital inflows and the comfortable reserve position of the RBI would support the currency. Meanwhile, the risks to our view stem from global uncertainties like possibility of withdrawal of stimulus by the Fed and revival of Euro Zone debt concerns. Moreover, with the General elections due next year, political dynamics will be a key factor towards shaping the exchange rate outlook in the future. 17 OCTOBER-NOVEMBER 2013
  18. 18. Inflation Control Finds Priority with RBI Reserve Bank of India (RBI) in its second quarter monetary policy review held on 29th October 2013 chose to hike the repo rate by 25 bps to 7.75 per cent and cut the marginal standing facility (MSF) rate by an identical margin to 8.75 per cent. Consequently, the Central Bank has now completed the process of re-aligning the interest rate corridor, bringing the MSF rate and the repo rate within the 100 bps spread. Citing the rising inflationary expectations coupled with persistently high retail inflation, the Central Bank made it aptly clear that its primary mandate was to control both and hence the rate hike was directed to achieve the same. Additionally, in the wake of liquidity remaining tight in recent weeks, RBI deemed it necessary to improve the liquidity flow in the economy; hence it increased the liquidity provided through term repos of 7-day and 14-day tenor from 0.25 per cent of net demand and time liabilities (NDTL) of the banking system to 0.5 per cent. It did not change the cap of 0.5 per cent of NDTL on daily repo borrowings that it had earlier imposed. RBI Hikes Repo Rate in Order to Curb Inflation (%) 10.00 9.00 7.75 8.00 6.75 7.00 6.00 5.00 4.00 4.00 Repo rate Reverse repo rate Oct-13 May-13 Dec-12 Jul-12 Feb-12 Sep-11 Apr-11 Nov-10 Jun-10 Jan-10 Aug-09 Mar-09 Oct-08 May-08 Dec-07 Jul-07 3.00 CRR Source: RBI CII is disappointed with the Central Bank's decision to hike repo rate as the current environment of fragile domestic demand warranted an easing of interest rates. CII believes that when the bulk of the pressure on inflation is supply-led, monetary policy is not the right tool to fight it. To be sure, domestic growth prospects have remained subdued as mirrored by the slipping of GDP growth to a 4-year low of 4.4 per cent in the first quarter of the current fiscal. This is the lowest quarterly growth rate since March 2009, when the global financial crisis was at its peak. However as per RBI, strengthening export growth and signs of revival in some services, along with the expected pick-up in agriculture, could support an increase in growth in the second half of 201314 relative to the first half, raising real GDP growth from 4.4 per cent in the first quarter to a central estimate of 5.0 per cent for the year as a whole. ECONOMY MATTERS On the inflation front, RBI expects WPI inflation to remain higher than the current levels through most of the remaining part of the year. WPI inflation rose to eight-month high of 7.0 per cent, while retail inflation (CPI) entered into double-digits in October 2013. The impact of Rupee depreciation on inflation and elevated food prices has offset the disinflationary impact of growth slowdown. Notwithstanding the easing in food price pressures with the arrival of the kharif harvest and the usual seasonal moderation, WPI Inflation is expected to remain elevated. In conclusion, while CII is fully appreciative of the RBI's concern on inflation, we feel that revival of growth should have found priority for the Central Bank. Industry would have liked reduction in the headline rates. Past experiences also show that the economy has responded favorably to cut in policy rates. Lower interest rates are 18
  19. 19. likely to aid the pick-up in domestic demand-drivers, including private consumption and investment. Revival in investment is critical for lifting the overall growth. The reduction in marginal standing facility (MSF) by 25 bps is encouraging as this is working as the short-term interest rate. Know Your Facts: Disinflation* A slowing rate of inflation is termed as disinflation. Inflation means the general rise in the price level in an economy. Disinflation is the deceleration in the pace of inflation or price rise. It is important to note that disinflation is different from deflation. Deflation is a state of continuous fall in the level of prices. So when policymakers talk about disinflation, it does not mean that the prices will fall. It simply means that prices will rise at slower pace. Normally, a central bank, through the various tools available with it, intends to attain a low and stable inflation in the country. If the country is grappling with a rapid rise in the level of prices, the central bank will increase the interest rates. Higher cost of money due to higher level of interest rates affects demand in the economy and the lower growth helps to contain prices. A higher level of interest rates, therefore, has a disinflationary effect. It is important for a central bank to anchor inflation and inflationary expectations as sustained level of high inflation could destabilise the entire economy. However, if the economy is in the state of deflation, or if there is a fear of it falling in deflation, the central bank will aggressively cut interest rates to stimulate demand and push the price level up. Deflation is extremely damaging for the economy. If the prices keep falling consumers may keep postponing consumption which can lead to further fall in prices. Hence, it is important to avoid such a situation. Therefore, policymakers intend to avoid extremes on both sides. *Adapted from Mint dated November 19, 2013 19 OCTOBER-NOVEMBER 2013
  20. 20. TAXATION Guest Article Social Security Agreements and Provident Fund for International Workers By Divya Baweja, Senior Director, Deloitte Touche Tohmatsu India Private Limited; Shailly Jain, Manager and Priyanka Arora, Assistant Manager, Deloitte Haskins & Sells contribute to the Indian Employee Provident Fund and Pension Scheme, in case their salaries did not exceed the threshold limit of Rs 6,500. As per the Provident Fund (PF) laws, international workers should contribute 12 per cent of their salary each month towards the Employees' Provident Fund (EPF). The employer makes a matching contribution, of which 3.67 per cent goes towards PF and 8.33 per cent goes towards the Employees' Pension Scheme (EPS), unlike the Indian employees where there is a cap of Rs 541 for contribution towards pension fund. I n November 2008, the Government of India made the existing social security scheme mandatory for expatriates by introducing the concept of 'international workers'. The definition of 'international workers' covers a foreign employee, holding a non-Indian passport, working for a covered establishment in India, and also includes an Indian employee deputed to a foreign country with which India has entered into a Social Security Agreement (SSA). The rationale for introduction of SSA was primarily to bring about parity with the overseas Social Security laws. Salary for the purpose of PF calculation includes basic wages, dearness allowance, cash value of food concession and retaining allowance. In respect of the international worker, it has been clarified that employees on a split payroll have to contribute PF on the total salary, which is received in India as well as outside India. International worker from a SSA country is not required to contribute to the PF in India on the fulfillment of certain prescribed conditions. Generally, Indian companies sending employees to work abroad, have to contribute to the host country's social security scheme, thereby increasing the overall cost of assignment. Further, these contributions end up being 'sunk costs', when employees return to India without having completed the mandatory period of stay in the host country. Further, prior to November 2008, the expatriates working in India were not required to ECONOMY MATTERS SSA is a bilateral agreement which eliminates payment of social security in the host country, thereby reducing the overall social security cost. It provides continuous benefits under the social security scheme of the home 20
  21. 21. country and exemption from contribution in the host country. Exemption is available in the form of 'detachment', under which a person covered by social security legislation in the home country will be governed only by such legislation, provided he obtains a Certificate of Coverage (COC). However, it has been clarified that international workers from SSA countries can withdraw PF amount contributed in India at the time of their return to the home country, subject to compliances. v The requirement of maintaining a bank account in India by the International Workers for receiving PF dues is no longer a pre-requisite, since the dues can now be received into the employer's bank account. An SSA provides the following benefits to internationally mobile employees, namely: 1. Detachment - extinguishes requirement of social security contribution in the host country v employees going abroad to SSA countries Indian 2. Exportability - pension benefits can be received in the county where an employee opts to stay after retirement availing the benefit of detachment would no longer be covered under the definition of International worker; such employees would not be subject to higher pension contributions. 3. Totalization -tenure of service served in one country will be included while calculating the pensionable period in the other country. v India has entered into a Comprehensive Economic Cooperation Agreement with Singapore, which has a specific clause on social security that excludes employees from contributing towards social security of the host country. Definition of "excluded employee" under the PF laws (defined as a person who is not required to contribute to the social security provided he has a COC) has hence been widened to include employees coming from Singapore on fulfillment of the prescribed conditions. In the absence of such SSAs, companies deploying employees abroad have to bear the social-security cost in home and host country. This significantly pushes the overall cost of deploying workers abroad. Till date India has signed SSAs with 17 countries out of which 9 are in force as on date viz., Belgium, Germany, France, Luxembourg, Switzerland, Denmark, Netherlands, Korea and Hungary. Further, India is also in negotiations with various other countries, including the UK and US (a major country in terms of Indian employees working abroad). The SSA which are signed but not yet effective are with Japan, Canada, Finland, Portugal, Czech Republic, Norway, Sweden, Germany (Comprehensive agreement) and Austria. v of domestic workers, PF account in India In case becomes inoperative after 3 years i.e., no interest is earned on the accumulated balance, in case no transaction happens in the PF account for continuous 3 years. However, it has been clarified that an international worker will continue to earn interest even after 3 years irrespective of the account becoming inoperative in India. There have been host of issues and concerns surrounding the PF law with respect to International workers. The Government of India has issued a number of clarifications in the recent past, clarifying some of the key areas: The Social Security law in respect of the international worker is still evolving. As more SSAs come into force, it will help in reducing the overall cost of expatriating people to and from India. Initially, international workers were not allowed v to withdraw the amount standing to the credit of the EPF till they attain the age of 58 years. (Views expressed in the article are those of the authors and not necessarily of CII) 21 OCTOBER-NOVEMBER 2013
  22. 22. SECTOR IN FOCUS Pharmaceuticals The National v Pharmaceutical Pricing Policy (NPPP) being announced towards the end of 2012 Higher v growth for the corresponding quarters and months in the previous year The NPPP implementation and the subsequent price v T he Indian pharmaceutical industry is a highly knowledge based industry which is growing steadily and plays a major role in the Indian economy. As a highly organised sector, a number of pharmaceutical companies are increasing their operations in India. The Indian pharmaceutical industry (IPM) is currently ranked tenth globally in terms of value and ranked third in volume. It is valued at Rs 720.6 billion in 2013 as against Rs 656.5 billion in 2012. It however experienced a slowdown with its growth going down to 9.8 per cent in 2013 from 16.6 per cent in 2012. From 2010 to 2012, the IPM grew at a CAGR of approximately 15 per cent. There has been a slowdown in the growth of the top Indian as well as multinational companies (MNCs). However, the slowdown is more prominent in the MNCs than in the Indian companies. In 2012, the top five MNCs had grown at the rate of 16 per cent which dropped down to 7 per cent in 2013. The IPM growth rate has declined after November 2012 from an average of 16 per cent to 8 per cent. This slowdown can be attributed to the following: ECONOMY MATTERS corrections leading to a low uptake among the stockists in second quarter of 2013. In order to overcome the ill-effects of slowdown, the Department of Pharmaceuticals has prepared a 'Pharma Vision 2020' document for making India one of the leading destinations for end-to-end drug discovery and innovation. The department provides requisite support by way of world class infrastructure, internationally competitive scientific manpower for pharma research and development (R&D), venture fund for research in the public and private domain and such other measures. Key Therapy Areas The top 10 therapy areas of the IPM contribute to approximately 90 per cent of the IPM sales. Chronic therapies (cardio, gastro, CNS and anti-diabetic) have been outperforming the market for the past four years and have grown at a rate of 14 per cent, faster than acute 22
  23. 23. therapies (anti-infectives, respiratory, pain and gynaec) which grew at 9.6 per cent. This is what effectively resulted in an overall slowdown in 2013. The Therapy contribution of chronic therapies to the IPM has gone up from 27 per cent in 2010 to 30 per cent in 2013. 2010 Contribution, % 2013, Contribution % 2013 Growth Acute 73% 70% 10% Chronic 27% 30% 14% India also has aspirations of becoming a knowledge hub for pharma. R&D in general and clinical trials in particular are an important aspect of this aspiration. India has been considered as an attractive destination for conducting such clinical trials. This is mainly due to India's genetic diversity; increasing and varied disease prevalence rates; availability of medical, pharmacy and science graduates, clinical infrastructure and comparative cost advantage. However, the regulatory delays in the clinical trials are adversely affecting this possibility. The Challenges Facing the Sector The Indian pharma industry is experiencing slow growth currently due to the new pricing policy and other regulatory challenges. However, making a slight change in the way they are doing business today can negate the impact in the long run. Henceforth, both the Indian and foreign companies operating in India will have to device suitable strategies in order to be in the top 10 global markets by 2020. Some of these strategies can be: portfolio optimisation, expansion into newer markets, improving sales force productivity, including newer technology and building a robust internal compliance programme. There have been reports about the use of vulnerable population groups in clinical trials. Lapses have been reported in the informed consent process. Concern has also been voiced about under-reporting of adverse events and delays in reporting adverse events in clinical trials. The pharma regulatory environment across the world is getting more stringent. In order to compete in the global market, the Indian pharma market needs a strong regulatory set-up. But, the sector is currently grappling with a number of issues like delays in clinical trial approvals, uncertainties over the FDI policy, the new pharmaceutical pricing policy, a uniform code for sales and marketing practices and compulsory licensing all of which need immediate attention. Some of these issues are discussed in detail below: The government of India has reported that there have been 2868 deaths during clinical trials in the period 20052012. It has also reported that there were 89 deaths which were related to clinical trials out of which compensation had been paid in 82 cases. Health activists and civil society groups have emphasised the need for payment of an adequate compensation to patient or kin because of injuries or death related to clinical trial. The need for timely payment of agreed compensation has also been highlighted by these groups. 1). Clinical Trials Responding to these concerns, the government has introduced a slew of measures: Safety and effectiveness of the medicines has to be established before regulatory approval is granted for new drugs. Clinical trials are the gold standard processes which determine the safety and effectiveness of these drugs. Clinical trials are also needed for the Indian pharmaceutical industry to develop cost effective therapies for diseases like tuberculosis, diarrheal diseases, malaria, leishmaniasis, and meningitis which affect India and the other developing countries and to capitalise on opportunities provided by bio-similars. v Registration of all clinical trials in India has been made mandatory. v Twelve National Drug Advisory Committees comprising eminent experts in different medical specialities were set up in 2012, to oversee approvals for clinical trials. v In January 2013, after observations by the Supreme Court, Government of India introduced two additional committees: the Technical Committee 23 OCTOBER-NOVEMBER 2013
  24. 24. under the leadership of the Director General of Health Services and the Apex Committee under the Secretary of Health and Family Welfare to supervise approvals for clinical trials in India. which addresses these concerns while ensuring the affordability as well as the availability of drugs in India 3). National Pharmaceutical Pricing Policy (NPPP) v Government has made registration of independent ethics committees mandatory. v The Drugs and Cosmetics Act has been amended to define adverse events related to clinical trials. Pharmaceutical price controls are seen all over the world. Through NPPP 2012, the government has enhanced the scope of the Drugs Price Control Order (DPCO) to include all the drugs in the NLEM. Combination drugs in which one of the drugs is a part of the NLEM were also brought under the ambit of DPCO. The government also changed the formula to arrive at the ceiling price from a cost based method to a market based method. The pharma companies are feeling the effects of the price controls associated with NPPP which will have a negative impact on their top line in the short term. However, with well thought out strategies, a large part of this impact can be negated in the medium to long term. v Timelines have been defined for the reporting of adverse events. v Government also introduced regulations for the computing and payment of compensation to patients or their kin for adverse events. v It has also instructed the supervision of clinical trial sites by regional offices of the Central Drugs Standards Control Organisation (CDSCO). The delays and regulatory uncertainty have severely derailed the innovation curve as well as the growth of the clinical trial industry. Ineffective regulatory oversight, need for safeguards for informed consent for vulnerable populations and compensation guidelines for patients for trial related deaths have emerged as major concerns. In terms of the clinical trials, where India could have been a leader, the country is losing out on opportunities because of the mentioned limitations. While companies have accepted the reality of price controls, one issue which has adversely affected the industry is the timeline for the implementation of DPCO. The industry felt that the government did not provide sufficient time for implementing the new packaging and labelling with the revised prices. There was also lack of clarity about the location where such packaging and labelling activities could be performed. Some companies had to go to court to get an extension and the ones who couldn't do so in time are still suffering. This confusion could have been easily avoided through consultation and by giving adequate time for the implementation of the revised prices. 2). FDI Policy Hundred per cent FDI through the automatic route is possible in the pharma sector in India. Given the high current account deficit, India requires FDI. The FDI policy, however, gives confusing signals. 100 per cent FDI in greenfield investments is allowed by the automatic route but after November 2011, the brownfield investments require the approval of the Foreign Investment Promotion Board (FIPB) which often comes with conditions. The time consumed in this process also acts a deterrent. FIPB conditions include the need to maintain production levels for the National List of Essential Medicines (NLEM) at the highest level for three years preceding the FDI, the need to maintain R&D expenses at the highest level for three years preceding FDI, the need for information on the transfer of technology to the administrative ministries and FIPB etc. The intention behind such restrictions may be good but it discourages investment. India needs a FDI policy ECONOMY MATTERS 4). Uniform Code on Sales and Marketing In an attempt to streamline the marketing efforts, the Department of Pharma (DoP) has issued guidelines on a uniform code on sales and marketing practices which are applicable to the pharmaceutical companies. This is a laudable step aimed at preventing corruption. The DoP guidelines however, are different from the Medical Council of India (MCI) guidelines on the sales and marketing practices. Tax authorities use the Central Board of Direct Taxes (CBDT) circular based on MCI 24
  25. 25. guidelines to decide on permissible sales and marketing expenses. Because of differing standards between the DoP and MCI guidelines, there is an increased need for clarity both from the point of view of the industry as well as the tax authorities. exports from India to the US rose nearly 32 per cent last year to US$4.23 billion. With increase in exports, Indian companies are drawing greater FDA scrutiny for quality and manufacturing compliances. For India to continue exporting to the foreign markets companies will have to step up their quality and manufacturing compliance programmes which are in line with the US FDA regulations. 5). Compulsory Licensing In countries like India, there should be a balance between the need for affordability of drugs and intellectual property (IP) protection. The intention of the government to ensure the availability of patented medicines at a reasonable price is noble but there are other ways of achieving the same goal. The indiscriminate use of compulsory licensing will undermine both the Indian as well as foreign pharmaceutical companies. The industry is also facing stricter regulations on manufacturing and quality practices in the domestic as well as international markets. Increasing confidence in the drugs manufactured in India is important. The regulators need to set the standards at par with the global ones through appropriate legislation. They also have to ensure that these standards are effectively enforced and complied with. India has an efficient pharmaceutical industry which has been making affordable drugs not just for the Indian market but has also been exporting them to the world. Addressing the above challenges in a holistic manner will strengthen the sector which constitutes a major part of the Indian economy. Pharma companies will have to devise suitable strategies to mitigate the risk emanating from the above discussed challenges for a sustainable and compliant growth over the next decade. 6). Manufacturing Quality India is the biggest supplier of medicines to the US and according to the industry sources, pharmaceutical Conclusion The economic environment in India is tougher now than ever before. While pharma companies focus their attention on measures to combat the growth slowdown, they will need to work with the government and other stakeholders to discuss and resolve regulatory challenges. Resolving the impasse with clinical trials will help companies continue with R&D which is central to their growth strategies. With numerous companies operating in multiple jurisdictions, the pharma and life sciences industry is one of the most heavily regulated in the world. Not surprisingly, the burden of successfully managing complex rules and regulations is a major issue facing the C-suite of pharma and life sciences companies worldwide. Instituting compliance programmes catering to regulatory requirements is not enough in today's volatile market where reputation is at stake. Companies need to take a 360degree approach for their compliance programmes encapsulating not only compliance with regulatory requirements but also their internal code of conduct and ethics code. A compliant pharma or life sciences company with a strong tone at the top will gain better competitive advantage in this economic environment in the long run. This article is based on the Report India Pharma Inc. Changing Landscape of the Indian Pharma Industry by PwC and CII published in October 2013 25 OCTOBER-NOVEMBER 2013
  26. 26. SPECIAL ARTICLE Micro, Small & Medium Enterprises (MSMEs) : Challenges & Prospects growth and self-sufficiency in a gamut of strategic, industrial and household goods, MSME manufacturing mandates the greater attention of policy makers and industry leaders alike. According to the All-India Census of MSMEs (2006-07), SMEs in the organised sector have nearly 32 per cent share of domestic manufacturing. Concerted efforts to enhance the productivity and global competitiveness of MSME manufacturing units will have a major bearing on India's manufacturing growth. Key Growth Driver T he Micro, Small & Medium Enterprise (MSME) sector has consistently outperformed the industrial sector over the last 5-6 years. The sector grew at an average 11 per cent in the period 2006-11, and recorded an impressive 19.6 per cent growth in 2011-12. Going by this growth trend, industry expects the MSME sector to increase its share of national GDP from the current 17 per cent to 22 per cent by 2020. Given that the MSME sector accounts for over 40 per cent of India's industrial output, exports and employment, sustained growth of this sector will have a major bearing on the country's manufacturing growth. Rapid MSME growth will also spur regional industrialisation as the sector is fairly evenly spread across urban and rural areas. While 55 per cent of SMEs operate in the urban areas, 45 per cent are located in the rural hinterland. As such, Indian MSME manufacturing units make an estimated 8,000 quality products for domestic and international markets. They command a notable presence in industrial sectors like food and beverages, apparel, fabricated metal products, repair and maintenance household goods, textiles, furniture, machinery and equipment, and so on. Moreover, in sectors like drugs and pharmaceuticals, MSMEs are expected to play a significant role in manufacturing. Currently, nearly 9,500 SME units account for around 87 per cent of total pharma production by volume and 40 per cent by value. These units have a key role in meeting Government's target of $25 billion worth pharma exports by 2014. MSME Manufacturing Growth Today, as India looks to accelerate its manufacturing growth in order to achieve sustained 8-9 per cent GDP ECONOMY MATTERS 26
  27. 27. What is significant from the small business perspective is that SMEs located both inside and outside NMIZs will be given relief from long-term Capital Gains Tax on sale of a residential property if the proceeds are invested in setting up a new SME firm in the manufacturing sector for buying new machinery and setting up the unit. SMEs that foray into green manufacturing will also be getting key fiscal incentives. Cluster Development Cluster development is proven strategy to boost MSME manufacturing activities. By definition, an SME cluster usually refers to SMEs operating in the same or related industrial sectors that generally tend to cluster close to one another. They perform well economically due to various factors such as proximity to raw material sources, suppliers and business partners, better coordination within members of the value-chain, presence of skilled labour force, etc. Growth-Enabling Schemes To push MSME manufacturing growth, Government has in recent years introduced several schemes for (i) Lean Manufacturing Competitiveness; (ii) Design Clinic; (iii) Marketing Assistance and Technology Upgradation; (iv) Technology and Quality Upgradation; (v) Promotion of ICT Tools for Clusters; (vi) Tooling and Training Centres; (vii) Improving Quality in Products; (viii) Barcode certification; (ix) IPR Awareness; and (x) Nurturing Innovative Business Ideas. The Cluster Development Programme for Enhancing Productivity also merits a special mention. While most MSME manufacturing firms are conversant with these schemes, many units would need to be better informed about how to access the various Central and state government-led MSME schemes and what benefits they can derive. Pertinent to note that CII has been at the forefront of many cluster development initiatives in the country. Today, several manufacturing clusters have emerged as leading producers in their respective industries. Prominent among these are the Panipat cluster that produces 75 per cent of blankets in India, the Tirupur cluster for hosiery, the Agra footwear cluster, the Ludhiana clusters for woollen knitwear, bicycle and bicycle parts, and sewing machines, the Jaipur cluster for gems & jewellery, the Pune cluster for auto ancillaries, to name a few. Manufacturing clusters have also benefited from various Government-led Cluster Development Initiatives that involve technical assistance, subsidies for technology upgrades and marketing support. Now, these clusters are also ushering in ICT tools and other technologies to strengthen their overall competitiveness. Perhaps, this is also an opportune time for IT vendors to build awareness among MSMEs about how IT applications can increase their competitiveness, enabling them to move up the value chain. Where fixed IT infrastructure costs are a constraint, the clusters could consider accessing Cloud-based IT services on a pay-as-you-go basis. MSME manufacturing enterprises also need to strengthen their management capabilities. Toward this, National Manufacturing Competitiveness Council (NMCC) and Japan International Cooperation Agency (JICA) launched the "1000 VSME Programme" this year with the objective of mentoring a thousand SMEs to make the switch from the archetype small 'm' mentality to the growth-oriented Big 'M' mindset. The transformational programme, led by globally acclaimed authority on Breakthrough Management Prof. Shoji Shiba, with CII as a partner, is designed to help manufacturing enterprises explore the challenging spheres of design, R&D, sales and supply chain. National Manufacturing Policy 2011 On a larger plane, MSME manufacturing received a big boost with the announcement of the new National Manufacturing Policy (NMP) 2011, which was formulated to enhance the share of manufacturing in India's GDP from 16-17 per cent to at least 25 per cent by 2020 and to create 100 million skilled jobs in 10 years. The new NMP has paved the way for major investments toward setting up large National Manufacturing & Investment Zones (NMIZs) in the country. All these developments and initiatives notwithstanding, MSME manufacturing continues to grapple with key challenges that need to be addressed on a war-footing. Most MSMEs, especially MSEs, operate at a very low scale and lack the wherewithal to scale-up, modernise and become globally competitive. In this context, the CII GTC-100 Programme launched this year is a pioneering initiative aimed at helping micro, small and medium enterprises grow out of their respective categories. 27 OCTOBER-NOVEMBER 2013
  28. 28. CII has also suggested a new scheme to supplement the promoter's equity contribution and facilitate the raising of additional debt, in cases where MSMEs are expanding; the launch of factoring services by all banks for MSMEs, to tackle the problem of delayed payments by customers; and securitisation of receivables owed to MSMEs for sales to large firms and their auction, with the proceeds paid out to small firms, which would consequently reduce MSMEs' investment in working capital and their need for finance. Key Challenges Most MSMEs continue to face limited access to timely credit and finance. While bank credit flow to MSME sector has steadily increased, the sector's credit and finance need gap is still considerably huge. The challenge hereon lies in promoting innovative financing of MSME businesses including manufacturing activities. The sector would also profit from improved access to new technologies, modern management practices including appropriate supply chain management solutions, basic infrastructure, and R&D and innovation. On export promotion and marketing activities, the CII memo suggested creation of awareness about various schemes available for MSMEs so as to make companies utilise such schemes; as well as creation of a fund to subsidise MSMEs' marketing operations. Key steps to boost credit and finance, technology and market access to MSME manufacturing units will buoy the long-term prospects of key MSME sectors like the toy industry that is facing unprecedented competition from cheap imports, especially from China. Reports indicate that around 40 per cent of Indian toy companies have closed down in recent times although the industry has recorded double-digit growth over the last five years. In addressing the infrastructure needs of MSME manufacturing units, Government could consider leasing out premises to these enterprises during their initial years of operation. Once they become financially stable, they could be given an option to buy the leased property at a fair price. Such a facility would enable startup companies to utilise their funds to gain stability and ensure growth. Also, wider adoption of ICT tools could make the MSME manufacturing units more competitive. The Internet can be a great equaliser for MSMEs, providing them with access to new markets, more customers and visibility so as to unleash their potential. The Indian toy industry is a major market for both domestic and international players, owing to low penetration and growth in the size of the middle class. India's toy industry has a meagre share of 0.51 per cent of the global market. The Indian toy market, whose size is estimated at about Rs 8,000 crore, is expected to grow at a CAGR of 30 per cent by 2015. Only 20 per cent of the Indian market is served by Indian manufacturers, with the rest being accounted for by imports mainly from China and Italy, which offer wider variety at lower prices and attract children of all ages. The field of supply chain management (SCM) is reaching a new stage. After a period dominated by enthusiasm for the newness of the idea of managing the stream of products across the whole chain, from supply through manufacturing to end-users, it is now realised that "one size does not fit all". It seems that the supply chain issues are much explored in the context of large enterprises but less attention is paid to MSMEs. A multi-pronged effort to boost MSME manufacturing growth will eventually accelerate India's emerged as a global manufacturing hub. On access to finance, CII has suggested in a memo to Government that provision of pre- and post-shipment foreign currency credit to the MSME sector at a lower rate; a uniform credit rating format and process to bring about transparency and speed to this important issue; an interest rate subvention, to enhance the competitiveness of MSMEs; setting up of a nodal agency to borrow in foreign currency from abroad on a pool basis and further lend to MSME exporters at competitive rates, for technological innovation, upgrades and capacity expansion. ECONOMY MATTERS 28
  29. 29. Driving the Growth of MSMEs Mr Deep Kapuria Chairman, CII National MSME Council Chairman, Hi - Tech Group of Companies In spite of increasingly turbulent global economic environment, for Indian MSMEs new horizons are opening up in terms of domestic and international opportunity. To bolster the sector's growth prospects, Government has taken major steps over the last two years, such as, introduction of the Public Procurement Policy for MSEs and the Defence Offset Policy, opening up of multi-brand retail to FDI, and mounting of various science and technology missions that would bring direct benefits to MSMEs. In addition to that Government's non-financial benefits to small and medium enterprises, which grow out of their category for a period of three years, are going to encourage a considerably large number of MSMEs to join our GTC 100 programme. We are also working with Government to ensure that the non-financial benefits reach a large number of enterprises, and for more such incentives to be given out to growth-oriented enterprises. In the pilot phase, CII will run the GTC 100 programme with 100 shortlisted companies based in the northern region. A year later, we will introduce this programme in the southern region, and cover the eastern and western regions the following year. Existing MSME cluster programmes run by CII has reached a level excellence and has been constantly supporting MSMEs for well over a decade and a half to enhance knowledge and competency for scaling up and growth. Now GTC 100 aims to extend this support in all segment of entire business processes while creating value addition for a sustainable future. The emerging circumstances mandate a paradigm shift in Indian MSME approach to business. Keeping in view the growth opportunities on the anvil, as also the attendant business risks, our enterprises need to grow into larger enterprises, obtain scale and wrest a larger share of global markets in their respective domains. While most MSMEs have demonstrated a keen desire to grow, they would need handholding on the means and methods to get to the level where they can engage successfully in international markets as well as address growing domestic demand for high quality goods and services. CII has also stepped up the focus on MSME export growth. The sudden decline in MSME share of national exports from 40 per cent to an estimated 36 per cent has prompted major Government steps to strengthen the sector's global competitiveness. However, Indian industry is aware that inadequate market development, limited R&D and innovation, and physical infrastructure bottlenecks have also contributed to the slowdown. In the effort to actualise this goal, CII has launched an innovative programme for 100 Golden Top Companies (GTC 100), to enable our small enterprises to grow into medium enterprises, and medium enterprises to graduate to the level of large enterprises. Enterprises that get selected for this programme will receive comprehensive business process support in two phases spread over 48 months, which will prepare them to emerge as world beaters in their sphere of business. 29 OCTOBER-NOVEMBER 2013
  30. 30. Leveraging Global Opportunities Mr Raman Saluja Chairman, CII Northern Regional Committee on MSMEs Managing Director- Oriental Engineering Works Pvt Limited The sudden decline in MSME share of national exports from 40 per cent to an estimated 36 per cent has prompted major Government steps to strengthen the sector's global competitiveness. While the dip in exports is chiefly attributed to continuing contraction of global markets, Indian industry is aware that inadequate market development, limited R&D and innovation, and physical infrastructure bottlenecks have also contributed to the slowdown. South Korea, Singapore, and Malaysia are even higher where SMEs drive their export boom. Over the years, Indian MSME manufacturers of items like readymade garments, leather goods, processed foods, engineering items, and sports goods have captured a sizeable share of global markets. Some of the other key MSME export products groups include pearls, precious stones and metals; electrical and electronic equipment; textiles, apparel and accessories; pharmaceutical products; machinery and mechanical appliances; items made of iron or steel; organic chemicals; vehicles other than railways and tramways; plastics, rubber and articles made from them; footwear, leather and leather products; travel goods; tools, implements and cutlery; tanning and dyeing extracts, tannins, derivatives and pigments; essential oils, perfumes, cosmetics and toiletries; stone, plaster, cement, asbestos and mica; carpets and other textile floor coverings; furniture, lighting, signs and prefabricated buildings. While this is a fairly diversified export portfolio, the sector will need to move up the global manufacturing value chain and capture a chunk of the high-end global markets. MSME sector has a key role to play in boosting India's export growth, especially in the wake of the country's exports declining by about 2 per cent to $300 billion in 2012-13, way below the $360 billion targeted at the beginning of the year. Worse still, trade deficit touched an all-time high of $190.1 billion in 2012-13, and current account deficit scaled 6.7 per cent of GDP in the third quarter of last fiscal - worrisome developments for both Government and industry. Export growth is of vital importance to the MSME sector. It is a measure of the sector's competitiveness. Hence, in times like now when export growth dips, MSMEs have good reasons to step up their innovation drive to gain a larger share of global markets, and become more nimble-footed and responsive to emerging market trends. Export markets also help MSMEs reduce their dependence on the relatively pricesensitive domestic market. In terms of destination, the main markets for 20 mostexported Indian MSME product groups, which accounted for more than 90 per cent of MSME exports from 2009 to 2012, include the US, EU, UAE, Turkey, Singapore, Hong Kong, Israel and Saudi Arabia. In stepping up the export drive, Indian MSMEs need to diversify its export destination and gain a larger share of the emerging markets as well. Yet, estimates suggest that less than 0.5 per cent of Indian MSMEs are engaged in exports. In comparison, 25 per cent of European SMEs participate in exports within EU and half of them (13 per cent) exports worldwide. The corresponding figures for Asian economies like Taiwan, ECONOMY MATTERS So, what specific steps are needed to help Indian MSMEs 30
  31. 31. gain a large share of global markets? resources to create in-house testing facilities, unlike the larger enterprises. In these circumstances, Government would do well to create world class testing infrastructure for the vast multitude of MSMEs in the country. Government has already accorded high priority to MSME export promotion, supported by key measures like simplification of procedures, incentives for higher production of exports, preferential treatments to MSMEs in the market development fund, simplification of duty drawback rules, etc. Further, there is a dire need for pushing for Mutual Recognition Agreements with other countries so that tests conducted in India gain global acceptance and recognition. To expand the base of exporting MSMEs, Government could initiate identification of MSMEs that are export worthy and provide them robust market intelligence, training and capacity building in relevant areas. There is a clear expectation that MSME share of total exports will reach 50 per cent in the 12th Plan period, from 36 per cent now. Minister of State (Independent Charge) for MSME, Mr K H Muniyappa, said recently the export revival will be largely driven by increasing demand from the western and emerging markets. The US and Europe account for 60 per cent of India's total exports. Certain industry quarters have also urged Government to provide assistance for establishing Export Development Companies (EDCs) floated collectively by at least 10 MSMEs (of same or similar product groups or based in clusters) to collectively market their produce. Also, trading houses with competencies of market development and international trade may be invited to come up in private or public-private partnerships to procure goods from MSMEs and export. Some of the other steps taken by Government that would greatly aid MSME exports are: v Hike in rate of interest subsidy from 2 per cent at present and providing financial assistance for product designing and skill development. v Doubling the upper eligibility limit for MSME exporters from Rs.15 crore to Rs 30 crore under the Market Development Assistance (MDA) scheme. Currently, the number of companies, showrooms and the outward FDI for capturing foreign markets is negligible. The sector would benefit immensely if Government were to extend financial support to MSMEs to open show rooms overseas. Similar financial support could also be given to MSME Associations / cluster associations for setting up office in focused markets/ foreign countries. MSMEs foraying into developed and emerging markets need robust market intelligence support. Government and industry could undertake product- or market-specific studies to help enterprises identify the right opportunities. v Enhancement of the financial ceiling for participation in trade fairs and exhibitions from Rs 1.8 lakh to Rs 2.5 lakh for focus Latin American countries, from Rs 1.5 lakh to Rs.2 lakh for focus African countries, focus CIS countries, focus ASEAN, Australia and New Zealand and from Rs 80,000 to Rs 1.5 lakh for other countries. v Enhanced reimbursement to the EPCs and higher ceiling of Rs 40 lakh for international exhibitions in excess of 75 members, which would encourage these organisations to provide greater exposure to Indian exporters. Looking ahead, MSME exports could increase exponentially if timely policy interventions are made toward building the right ecosystem for targeting global markets. MSMEs on their part need to pro-actively focus on R&D and innovation and raise the quality standards of their offerings without blunting their cost competitiveness. Enterprises on their part also need to match the increasing standards of global supply chains to increase their own market share. However, they are likely to face greater challenges in meeting the standards for want of easy access to test facilities. MSMEs by and large lack the 31 OCTOBER-NOVEMBER 2013
  32. 32. Meeting the challgnes of Services MSMEs In the overall pie of small enterprise (29.8 million) in the country, MSME services sector accounts a lion share, as, according to the 2012-13 annual report of the Ministry of MSME, Government of India, in the total small enterprises, 68 per cent of the enterprises are in the services and in the total registered small enterprises 33 per cent of the enterprises are engaged in the services activities. Besides, the services sector stands above the manufacturing sector in terms of business confidence. Service industries such as retail trade, repair and maintenance, and restaurants are typically cash businesses with shorter turnaround, because of which their overall external capital requirements tend to be low on an average. On the other hand, there are knowledge-based services industries such as software development and management consulting within the services sector, the finance requirements of which are similar to that of manufacturing industries i.e. higher working capital and capital expenditure requirements. Financial Issues Some characteristic traits of the demand of services enterprises are: The share of working capital as a portion of the average debt demand for services enterprises is estimated to be 41 per cent. Services enterprises require less external capital on an on-going basis, except for such things as work premises renovation, purchase and refurbishment of equipment. Despite the significant contributions of the MSME services sector, the sector continues to face certain constraints like, as pointed out in PM's Task Force Report, availability of adequate and timely credit, high cost of credit, collateral requirements and access to equity capital. It thus emerges that adequate, timely and affordable credit is one of the bigger issues for the MSME sector. They do, however, need significant capital support during the start-up stage. Given the nature of most of these enterprises, they have limited access to immovable collateral which makes access to formal finance challenging. Knowledge-based enterprises require working capital for primarily investing in people. For this, businesses either depend on internal accruals or internal equity investments, as debt from formal financial institutions for financing of man power costs remains a challenge. Services enterprises make up 27 per cent of the overall viable and addressable debt gap. Financing is better in traditional services industries such as retail, small transport operators, and hospitality, as financial industries have a better understanding of these sectors. Some of the reasons for gap in the sector are: Traditional services experience a greater debt shortfall in capital expenditure financing compared to working capital requirements because there is a high level of cash transactions in business operations that can be used to finance working capital needs. Enabling Environment Growth of MSME services needs to be reinforced by holistic fiscal support and enabling policies. Similarly, improving the policy framework and incentivizing financial institutions to innovate can increase the penetration of formal financial services to the MSME sector. The government provides financing support to the sector through the Small Industries Development Bank of India (SIDBI). SIDBI provides wholesale financing support to small financial institutions such as NBFCs that operate in the MSME sector. Although traditional services enterprises often have access to primary security, they tend to transact mostly in cash, with limited records of their financial transactions. Due to inadequate information on financial behavior of the enterprise and entrepreneur; the sanctioned finance limits tend to be lower than what they need. Financial institutions do not have reliable financing benchmarks for the services sector unlike for the manufacturing sector. As a result, there is greater difficulty in determining the actual financing needs of different types of enterprises in the services sector, leading to under-financing of the sector. ECONOMY MATTERS SIDBI also provides retail finance support to MSMEs, particularly in the growth stage through schemes such 32
  33. 33. as Growth capital and Equity assistance for MSME (GEMS). In addition to providing debt finance, SIDBI has also set up SIDBI Venture Capital Limited to supply equity to the MSME sector. To minimise the effect of immovable collateral on access to finance for MSMEs, the government and SIDBI have co-funded a credit guarantee fund, Credit Guarantee Trust for Micro and Small Enterprises. exchanges expect at least 10 small and medium enterprises to list over a period of twelve months. Skill Development To support the growth of technology-based enterprises, the government plans to set up 100 incubators under the auspices of engineering and technology institutions by 2015. There is also a proposal to expand the services of MSME Development Institutes and technology incubators to provide hand-holding and advisory support to enterprises. This would provide confidence to financial institutions about the viability of an enterprise. To encourage book-keeping and improve financial awareness of enterprises, the government has instituted a credit rating scheme for the MSME sector with NSIC as the coordinating agency. The rating scheme offers subsidized credit rating services to enterprises with the intention of supporting market development in this regard and encouraging more enterprises to get rated. Given the right momentum, availability of a credible rating could have a positive impact in terms of financial institutions willingness to finance certain enterprises, as well as in terms of reducing turnaround time eventually, by using the rating to substitute some parts of the credit risk assessment process. Technology Adoption The MSME sector is characterized by low adoption of technology, which impacts the sector's competitiveness. In order to encourage enterprises to invest in technology, the government also provides Credit-Linked Capital Subsidies (CLCS) for technology investments. The government leverages the credit infrastructure of the public sector banking network to make the subsidy available to MSMEs. SME Stock Exchange In order to facilitate the flow of equity capital to the small and medium enterprises, and offer potential investors a platform for exit, the government and the Securities and Exchange Board of India (SEBI) proposed the formation of the SME Stock Exchange. Currently, two mainstream stock exchanges -- the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE) - have started SME stock exchanges in India. Both the Conclusion There have been significant efforts to strengthen the enabling environment for MSME service sector, which have had a positive impact on the sector as a whole. However, challenges in formulating and implementing effective policy continue to impede the growth of MSME service. 33 OCTOBER-NOVEMBER 2013
  34. 34. ECONOMY MATTERS The Facts Keeps readers abreast of global & domestic n economic developments Monthly Journal of top management of 8000 n companies Read n by CII Members, Thought Leaders, Diplomats, Policy Makers, MPs and other decision makers The Coverage Global n Trends Domestic n Trends Corporate n Sector n Performance in Focus Special n Article Special n Feature Economy n Monitor CII invites full-page* Advertisements for this flagship document at an attractive rate of Rs 60,000 per issue and Rs 6 lakh for 12 issues. For more details, Please Contact: Dr. Danish A. Hashim, Director- Economic Research Confederation of Indian Industry The Mantosh Sondhi Centre, 23, Institutional Area, Lodi Road, New Delhi- 110003 (INDIA) Tel : +91-011-24629994-7, Fax: +91-011-24626149; Email:
  35. 35. ECONOMY MONITOR GLOBAL GDP (y-o-y%) China GDP Growth Japan GDP Growth Euro Area GDP Growth US GDP Growth 7.9 7.7 7.5 7.8 4Q12 1Q13 2Q13 3Q13 6.7 7.4 6.6 6.6 3QFY13 4QFY13 1QFY14 3.1 2.0 1.3 1.6 1.6 3.8 0.3 -0.6 -0.7 -1.0 3Q12 4Q12 1Q13 2Q13 3Q13 3Q12 3Q13 0.3 3Q12 4Q12 1Q13 0.9 -0.4 2Q13 0.4 -1.2 4Q12 1Q13 2Q12 2Q13 3Q12 GDP GROWTH (y-o-y%) Industry Agriculture Overall GDP Services 7.7 5.4 5.2 4.7 4.8 7.6 4.4 2.9 2.7 1.7 1.8 2QFY13 3QFY13 1.8 1.4 2.7 2.5 1.3 0.2 1QFY13 2QFY13 3QFY13 4QFY13 1QFY14 1QFY13 4QFY13 1QFY14 1QFY13 2QFY13 3QFY13 4QFY13 1QFY14 1QFY13 2QFY13 WPI INFLATION (y-o-y%) Primary Overall Manufacturing Fuel 12.7 14.7 13.6 8.8 7.0 5.2 5.9 6.5 11.4 10.3 13.5 10.1 9.7 7.5 7.0 2.9 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Jun-13 Jul-13 Aug-13 Sep-13 Jun-13 Oct-13 Jul-13 Aug-13 Sep-13 Oct-13 2.6 Jun-13 Jul-13 2.3 2.0 2.5 Aug-13 Sep-13 Oct-13 INDEX OF INDUSTRIAL PRODUCTION (IIP) (y-o-y%) Electricity Manufacturing General Mining 12.9 7.2 6.2 5.2 3.3 3.2 2.8 2.0 0.6 0.4 0.0 -0.2 -2.5 -1.8 -1.0 -1.7 -2.5 -3.2 -4.3 -5.9 May-13 Jun-13 Jul-13 Aug-13 Sep-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 May-13 35 Jun-13 Jul-13 Aug-13 Sep-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 OCTOBER-NOVEMBER 2013
  36. 36. EXTERNAL ACCOUNT Exports (%) Imports (%) 13.0 13.5 12.3 12.2 Current Account Deficit (US$ Bn) 63.2 21.8 21.1 10.9 11.2 Avg Exchange Rate (Rs/US$) 31.8 11.6 Trade Deficit (US$ Bn) 10.5 Oct-13 1QFY13 1QFY14 61.6 59.8 58.4 Jun-13 18.2 17.1 63.8 6.8 0.1 -0.7 -5.3 -6.2 -18.1 Jun-13 Jul-13 Aug-13 Sep-13 -14.5 Oct-13 Jun-13 Jul-13 Aug-13 Sep-13 2QFY13 3QFY13 4QFY13 Jul-13 Aug-13 Sep-13 Oct-13 MONETARY VARIABLES (%) Non-Food Credit Growth (y-o-y%) 17.3 18.4 17.9 Repo Rate (%) 7.25 12.8 Jul-13 Aug-13 Sep-13 Oct-13 12.5 12.2 12.5 Jul-13 Aug-13 Sep-13 Oct-13 7.25 Aug-13 Sep-13 7.75 7.50 Jul-13 Cash Reserve Ratio (%) 4.00 4.00 4.00 4.00 4.00 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 14.1 Jun-13 7.25 Jun-13 16.8 14.6 Jun-13 M3Growth (y-o-y%) Oct-13 CAPITAL FLOWS (US$ billion) Net FII Flows (US$ billion) Net FDI Flows (US$ billion) Forex Reserves (US$ billion) ECB flows (US$ billion) 284.6 281.3 277.2 275.5 4.2 276.3 2.8 3.2 2.0 1.2 -3.0 Aug-13 Sep-13 Oct-13 1.7 1.7 Jul-13 Aug-13 0.5 1.0 1QFY13 2QFY13 0.9 -2.5 Jul-13 2.1 0.4 -7.5 Jun-13 May-13 Jun-13 Sep-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 3QFY13 4QFY13 1QFY14 OTHER IMPORTANT INDICATORS (y-o-y%) Core Sector Growth (y-o-y%) Steel Production Growth (y-o-y%) Cement Production Growth (y-o-y%) 11.5 8.0 12.0 10.0 5.5 3.1 2.3 Commercial Vehicles Production Growth (y-o-y%) 6.0 2.4 4.0 2.3 0.8 0.1 7.0 8.0 3.7 2.0 0.0 4.0 6.6 4.3 3.4 1.9 -15.4 May-13 Jun-13 Jul-13 Aug-13 Sep-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Jun-13 -17.9 -19.6 Jul-13 Aug-13 -28.6 Sep-13 Source: RBI, CSO, SEBI, Office of Economic Advisor, Bureau of Economic Analysis, Euro Stat, Bank of Japan, National Bureau of Statistics ECONOMY MATTERS 36 -22.6 Oct-13