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Economy Matters September- October 2014

Industrial production growth continues to remain tepid, thus necessitating the need for urgent redressal steps from the government in the form of expediting execution of approved projects and providing a competitive market for coal and mining sectors. Global headwinds have not receded fully, with growth in Euro Area expected to remain lackadaisical for few more quarters. Japan and China are passing through a phase of below potential growth too. Under this backdrop of subdued global growth, policymakers need to announce more policy actions like 'Make in India' initiative and flexible labour policy to help lift domestic growth to a higher trajectory.

In the current issue of Economy Matters, we cover the latest IMF’s World Economic Outlook and the issue of deflation facing many advanced economies in the Section on Global Trends. In Domestic Trends, we analyse the trends emanating out of the recent releases on IIP, Inflation, Monetary Policy and Trade. We also discuss the Corporate performance for Q2FY15 in this section. The Sectoral spotlight for this issue is on the MSME sector. In Focus of the Month, sectoral experts provide their insightful viewpoints on the topic ‘Coal: Challenges and Way Forward’.

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Economy Matters September- October 2014

  1. 1. ECONOMY MATTERS 2
  2. 2. Despite setbacks, an uneven global recovery continues. Largely due to weaker-than-ex-pected global activity in the first half of 2014, the growth forecast for the world economy has been revised downwards in the latest edition of IMF’s World Economic Outlook (WEO). Short-term risks include a worsening of geopolitical tensions and a reversal in the recent com-pression of risk spreads and volatility in financial markets. In order to mitigate these risks, advanced economies will require continued support from monetary and fiscal policies. Pre-mature withdrawal of the expansionary policies will hurt their growth prospects. In emerging markets, the scope for macroeconomic policies to support growth if needed varies across countries and regions, but space is limited in countries with external vulnerabilities. Going forward, both advanced and emerging economies would need to implement structural re-forms 1 FOREWORD SEPTEMBER - OCTOBER 2014 to make growth more sustainable. On the domestic front, industrial production data for the month of August 2014 indicated that the slowdown phase is not over yet. What is worrisome is the poor performance of the manufacturing sector which continues to be under stress as new orders are not forthcoming in a big way. There is need for taking cognizance of the slow growth of industrial produc-tion and take steps to revive investment and stimulate demand in the economy. Recent an-nouncements and policy actions like ‘Make in India’ initiative, ensuring flexible labour policy, etc should help the turnaround. Inflation, in contrast, has been trending downwards, thanks to lower global crude prices, stable currency and proactive measures taken by the govern-ment. This will allow RBI to reduce interest rates in the coming months in order to cushion falling industrial growth. The recent Supreme Court verdict cancelling all but four coal blocks allocated since 1993 has increased by manifolds the challenges faced by this important sector. The ruling is likely to cause many far reaching “consequences” for the Indian coal sector in terms of its effect on coal production, on coal supplies to the core/other industries, on the resulting compulsion for coal imports, in particular, and the Indian economy, in general. The apex court’s decision should act as an opportunity for the government to have a full review of the coal sector policy and come up with appropriate coal reforms. Recently, it allowed the e-auction of coal blocks, which would help private firms in the steel, power and cement sectors through cap-tive use of mines. Given the fact that India has a huge power deficit fuelled by a persistent coal shortage, it is pivotal that the government chalks out a strategy to pull out the sector from its current bout of difficulties at the earliest. Chandrajit Banerjee Director General, CII
  3. 3. 3 SEPTEMBER - OCTOBER 2014
  4. 4. 5 EXECUTIVE SUMMARY SEPTEMBER - OCTOBER 2014 Global Trends With world growth in the first half of 2014 slower than ex-pected, the October 2014 World Economic Outlook of IMF revised the global growth projections for 2014 and 2015 downwards to 3.3 per cent and 3.8 per cent, respectively. Among advanced economies, growth is projected to pick up, but is slower in the Euro Area and Japan and gener-ally faster in the US and elsewhere. Among pertinent risks are the geopolitical turmoil in Ukraine and Middle East and the fear of weak recovery in Euro Area. Further, dis-inflation, largely driven by softening of commodity prices, presents a concern. Not only are the advanced economies challenged by output gaps, weak credit conditions, and financial fragmentation, but in emerging market and de-veloping economies too, inflation is projected to decline. Domestic Trends IIP data for the month of August 2014 shows that indus-trial production continues to be in the slowdown phase and a visible turnaround in industrial growth is still not happening. And if we factor in the base effect, the per-formance of industry shows that demand is yet to show distinct signs of a pick-up. There is need for taking cog-nizance of the slow growth of industrial production and take steps to revive investment and stimulate demand in the economy. Inflation on the other hand has been tread-ing downwards. Both WPI and CPI based inflation moder-ated in September 2014 as food prices came down. Over the next 2 months, headline CPI inflation could ease fur-ther due to a base effect from last fiscal, lower crude oil prices, revival of monsoon, proactive measures taken by the government to keep food prices under control, and a stable currency. This would also give RBI the necessary leg-room to ease interest rates. Corporate Performance in Q2FY15 Second quarter earnings of companies show that a sus-tained recovery in earning growth remains elusive. In fact, net sales of companies (manufacturing plus services) grew at the slowest pace in four quarters at 11.4 per cent, slower than 13.8 per cent in the preceding June quarter, and the 14.9 per cent growth in the year-ago September quarter. In contrast, the performance analyzed in terms of Profit after Tax (PAT) exhibits an improvement in financial results of companies at aggregate level. On an aggregate basis, growth in PAT improved significantly to 17.9 per cent in the second quarter as compared to growth to the tune of 14.9 per cent in the same quarter of last year. This has been driven by sharp improvement in PAT growth of manufacturing sector. Our analysis is based on the finan-cial performance of 246 companies (146- Manufacturing and 100 Services and excludes oil & gas companies), using a balanced panel, extracted from the Ace Equity database. However, since our analysis is based on small sample of firms, it is too early to say anything conclusively. Sector in Focus: MSME If India is to emerge as one of the leading economies over the next decade in light of a positive political and eco-nomic scenario, the Micro, Small & Medium Enterprises (MSME) segment is expected to play a significant role. The development of this segment is extremely critical to meet the national imperatives of financial inclusion and genera-tion of employment in urban, rurban and rural areas. Fur-ther, it can nurture and support new age entrepreneurs who have the potential to create globally competitive businesses in India. Seizing the emerging opportunities to develop a robust MSME sector as a strong backbone for a growing economy will require efforts by the Government to bring the various stakeholders – Equity funds, banks and financial institutions, industry sector majors and MNCs, regulators across various Ministries in Centre and State and trade associations and global economies having trade flows with India and others stakeholders together; and create a forward looking framework and ecosystem. Focus of the Month- Coal: Challenges and Way Forward Coal with a proven reserve of 860 billion tonnes is mined the most in the world. At the same time, the demand curve for this sector is always on the rising side. As a pros-pering economy, India faces energy security as a growing challenge and the coal production is expected to grow at a fast pace. However, the recent Supreme Court verdict cancelling all but four coal blocks allocated since 1993 has increased by manifolds the challenges faced by this impor-tant sector. The ruling is likely to cause many far reaching “consequences” for the Indian coal sector. To negate the ill-effects of the cancellations of coal blocks, the cabinet recently cleared an ordinance to facilitate the allotment of coal mines to state-owned companies that need the fuel, and also to private entities in businesses such as power, iron and steel, and cement for so-called captive consump-tion. Hence, the spotlight currently is clearly on coal sec-tor. In this month’s focus of the month, we invite experts to voice their opinions on the many challenges faced by the sector and the way forward.
  5. 5. GLOBAL TRENDS Legacies, Clouds, Uncertainties The world economy is in the middle of a balancing act. While countries must address the legacies of the global financial crisis, ranging from debt overhangs to high unemployment, they face a cloudy future. The interplay of these two forces has resulted in several downward revisions to the forecast during the past three years. Because these two forces operate to different degrees in various countries, the evolution of the global economy has become more differentiated. With world growth in the first half of 2014 slower than expected, global growth for 2014 is projected at 3.3 per cent, 0.4 percentage point lower relative to the April 2014 World Economic Outlook (WEO). The growth pro-jection for 2015 is also slightly lower at 3.8 per cent. Growth prospects across both advanced economies and emerging markets exhibit sizable heterogeneity. Among advanced economies, growth is projected to pick up, but is slower in the euro area and Japan and generally faster in the US and elsewhere. Among major emerging markets, growth is projected to remain high ECONOMY MATTERS 6 in emerging Asia, with a modest slowdown in China and a pickup in India, but to stay subdued in Brazil and Rus-sia. Outlook for Advanced Economies In the US, conditions remain in place for a stronger pickup in the recovery: an accommodative monetary policy stance and favorable financial conditions, much-reduced fiscal drag, strengthened household balance sheets, and a healthier housing market. Asset purchas-es by the Federal Reserve are projected to end in Octo-ber 2014. Employment growth is projected to be strong. In the euro area, a weak recovery is projected to gradu-ally take hold, supported by a reduction in fiscal drag, accommodative monetary policy, and improving lend-ing conditions, with a sharp compression in spreads for stressed economies and record-low long-term interest rates in core countries. Growth is projected to average 0.8 per cent in 2014 and 1.3 per cent in 2015, weaker than April 2014 projections. Prospects are uneven across countries. Growth in Spain has resumed, supported by external demand as well as higher domestic demand reflecting improved financial conditions and rising con-fidence. The Italian economy, in contrast, contracted in
  6. 6. 7 GLOBAL TRENDS SEPTEMBER - OCTOBER 2014 the first half of 2014, and on an annual basis is not ex-pected to return to positive growth until 2015. Growth projections for the German economy have been revised downward relative to April 2014, primarily reflecting a weaker recovery in domestic demand. Growth in France stalled in the first half of 2014, and projections have been revised downward. In Japan, in light of the larger-than-expected contrac-tion in the second quarter, GDP is now projected to in-crease 0.9 per cent in 2014—0.5 percentage point less than April 2014 projections. With private investment expected to recover, growth is projected to remain broadly stable in 2015, notwithstanding the planned fis-cal adjustment. In most other advanced economies, including Canada, Norway, Sweden, and the UK, growth is expected to be solid. In the UK, activity has rebounded and become more balanced, driven by both consumption and busi-ness investment, thanks to improving credit and finan-cial market conditions and healthy corporate balance sheets. Growth is projected to average 3.2 per cent in 2014 and 2.7 per cent in 2015, about 0.25 percentage point stronger than forecast in April 2014. House prices are increasing at a strong pace, especially in London, and have also been buoyant in other advanced econo-mies, including Canada, Norway, Sweden, and Switzer-land. Outlook for Emerging Market and Developing Economies In China, after a weaker than- expected first-quarter outturn, the authorities deployed policy measures to support activity, including tax relief for small and me-dium enterprises, accelerated fiscal and infrastructure spending, and targeted cuts in required reserve ra-tios. Growth gained traction in the second quarter on these measures, as well as on stronger exports, and is projected to average 7.4 per cent in 2014, in line with the authorities’ target. For 2015, growth is projected to moderate to 7.1 per cent as the economy makes the transition to a more sustainable path and residential in-vestment slows further. In India, growth is expected to increase in the rest of 2014 and 2015, as exports and investment continue to pick up and more than offset the effect of an unfavora-ble monsoon on agricultural growth earlier in the year. The outlook is slightly stronger for 2014 relative to that in April 2014, and unchanged for 2015. Growth in the ASEAN-5 is projected at 4.7 per cent in 2014, rising to 5.4 per cent in 2015. Relative to that in April 2014, the fore-cast is slightly weaker for 2014—driven by a sharp slow-down in Thailand amid political tensions earlier in the year—and unchanged for 2015. Elsewhere in emerging and developing Asia, growth is likely to remain strong, helped in part by favorable financial conditions and broadly accommodative policies. Growth for Latin America and the Caribbean is now
  7. 7. ECONOMY MATTERS 8 GLOBAL TRENDS projected to fall to 1.3 per cent in 2014, with a rebound to some 2.2 per cent in 2015. In Brazil, GDP contracted in the first half of the year, reflecting weak investment and a moderation in consumption, given tighter finan-cial conditions and continued weakness in business and consumer confidence. In Mexico, weak external de-mand and construction activity, lowered projections for this year relative to April 2014 forecast. Elsewhere in the region, downward growth revisions reflect weaker do-mestic demand (Chile and Peru); deepening macroeco-nomic and policy imbalances that are manifesting them-selves as high inflation, negative growth, and a rising differential between the parallel and official exchange rates in Argentina; and severe policy distortions that have led to widespread shortages, a collapse in growth, and inflation now exceeding 60 per cent in Venezuela. The forecast for the Commonwealth of Independent States has significantly weakened. In Russia, investment remains weak amid subdued confidence, which is fur-ther affected by geopolitical tensions and sanctions. Ac-tivity is not projected to pick up before 2015. Continued declines in industrial production and exports will cause a sharp contraction in activity in Ukraine in 2014, with conditions improving slowly next year. Growth in the rest of the CIS has already slowed, with weaker trade and remittance flows from Russia, and is projected to be lower in 2014– 15 relative to April 2014 projections. With increased strife in the region, pickup in growth in the Middle East, North Africa, Afghanistan, and Paki-stan region is projected to be weaker relative to April 2014 forecast. Growth is expected to increase in 2015, assuming that security improves, allowing for a recov-ery in oil production, particularly in Libya. In sub-Saharan Africa, growth is projected to remain strong, broadly in line with April 2014 WEO projections over 2014–15. In South Africa, 2014 growth is being dragged down by industrial tensions and delays in fixing infrastructure gaps, including electricity constraints. A muted recovery is expected in 2015. In contrast, in Nige-ria, activity has been resilient despite poor security con-ditions and a decline in oil production earlier this year. In a few countries, including Ghana and, until recently, Zambia, large macroeconomic imbalances have result-ed in pressures on the exchange rate and inflation. The Ebola outbreak is set to have an acute impact on the economies of Guinea, Liberia, and Sierra Leone. External Sector and Outlook for Rebalancing Global trade volume growth slowed markedly in the first half of 2014 compared with global activity. Some of the slowdown in trade growth could reflect a more modest pace in the fragmentation of global production processes (value chains) after years of rapid change. And some of this slowdown could be cyclical, reflecting declining world growth since 2011. Risks The downside risks are clear. First, the long period of low interest rates has led to some search for yield, and financial markets may be too complacent about the future. These risks should not be overplayed, but poli-cymakers clearly must be on the lookout. Macro pru-dential tools are the right instruments to mitigate these risks; whether they are up to the task, however, is an open question. Second, geopolitical risks have become more relevant. So far, the effects of the Ukraine crisis have not spread beyond the affected countries and their immediate neighbors. And the turmoil in the Mid-dle East has not had much effect on the level or volatil-ity of energy prices. But clearly, this could change in the future, with major implications for the world economy. Third, there is a risk that the recovery in the euro area could stall, that demand could weaken further, and that low inflation could turn into deflation. Adapting to a Changing Environment in EMDEs While recovery in advanced economies suggests in-crease in demand for emerging market exports, ensu-ing normalization of monetary policy would indicate re-versal of capital flows that went to emerging markets. In this environment, these countries should continue to manage external financial shocks with exchange rate flexibility, complemented with foreign exchange intervention to limit excessive market volatility. Vul-nerabilities in some countries relate to rapid domestic credit expansion. In other economies, higher external borrowing has increased exposure to external fund-ing risks, and raising domestic saving rates, including through stronger public finances, should be a priority (Brazil, Turkey). In China, rebalancing toward domestic demand has been characterized by booming invest-ment and credit, with credit intermediation occurring
  8. 8. 9 GLOBAL TRENDS SEPTEMBER - OCTOBER 2014 not only through banks, but also through local govern-ment and shadow banking. Expansion of social safety net, by reducing the current high rate of social security contribution would help reduce household saving rates and raise domestic consumption. This domestic rebal-ancing strategy, together with further exchange rate flexibility, would also contribute to global rebalancing. The agenda, naturally diverse across countries, includes removing infrastructure bottlenecks in the power sec-tor (India, South Africa); easing limits on trade and in-vestment and improving business conditions (Indone-sia, Russia); and implementing reforms to education, labor, and product markets to raise competitiveness and productivity (Brazil, China, India, South Africa) and government services delivery (South Africa). The poli-cies implemented in Mexico—particularly opening en-ergy and telecommunications sectors to competition, and labor market reforms—are welcome steps. The post-election recovery of confidence in India also pro-vides an opportunity for that country to embark on its much-needed structural reforms. Inflation Outlook Inflation remains too low in advanced economies, an in-dication that many of these economies have substantial output gaps, and deflation continues to be a concern. In the US, inflation measured with the personal con-sumption expenditure deflator is forecast to be 1.6 per cent at the end of 2014 and to rise gradually toward the Federal Reserve’s longer-term objective of 2 per cent. In the euro area, inflation is projected to increase gradu-ally as the recovery strengthens and output gaps slowly decrease, to 0.9 per cent on an annual basis in 2015 and 1.2 per cent in 2016. But price pressures are expected to remain very subdued under the current baseline pro-jections, because persistent output gaps, weak credit conditions, and financial fragmentation—especially in stressed economies—will combine to contain prices. As a result, euro-area-wide inflation rates are expected to remain substantially below the ECB’s price stability ob-jective through at least 2019 with current policies, sug-gesting that the risk of inflation expectations becoming unanchored has increased. In Japan, headline inflation is projected to rise to an an-nual average rate of 2.7 per cent in 2014. This rise re-flects the consumption tax increase, but underlying in-flation is rising as well, at 1.1 per cent this year. Inflation is projected to increase gradually toward the 2 per cent target in the medium term as the output gap closes and inflation expectations rise. In emerging market and de-veloping economies, inflation is projected to decline in 2014, in line with the April 2014 WEO projections, and to remain broadly unchanged in 2015. The recent decline reflects to an important extent the softening of com-modity prices—particularly those for food commodi-ties, which have a high weight in the consumer price index baskets for these countries. The Inflation Quandary
  9. 9. ECONOMY MATTERS 10 GLOBAL TRENDS Fighting Low Inflation and Sustaining the Recovery in Advanced Economies Across advanced economies, output gaps generally re-main large and are projected to close only gradually, in-flation is low, and dealing with high public debt requires fiscal consolidation to continue, as discussed in the Oc-tober 2014 Fiscal Monitor. Thus, maintaining an accom-modative monetary policy stance to support the recov-ery is essential. Within these broad contours, however, challenges increasingly differ across countries. The recovery in the euro area remains weak and une-ven, unemployment rates far exceed their equilibrium value in most countries, and euro-area-wide inflation is too low, pointing to pervasive weakness in domestic demand. This requires policy actions to support activity. On the monetary policy front, recent measures taken by the ECB—lower policy rates, and the announcement of cheap term funding for banks and a program of private asset purchases— are welcome. But if the inflation out-look does not improve and inflation expectations con-tinue to drift downward, the ECB should be willing to do more, including purchases of sovereign assets. Never-theless, reducing fragmentation in stressed economies and ensuring that inflation rises back toward the price stability objective requires action beyond monetary policy. The review of banks’ asset quality that is cur-rently underway is critical to reestablishing confidence in banks and improving intermediation. And looking beyond the demand constraints, structural measures must be taken to increase very low potential growth rates—as discussed further in the next subsection. On the fiscal policy front, the pace of fiscal consolidation has slowed and the overall fiscal stance for 2014–15 is only slightly contractionary. This strikes a better bal-ance between demand support and debt reduction. Germany, which has completed its fiscal consolidation, could afford to finance much-needed public investment in infrastructure (primarily for maintenance and mod-ernization), without violating fiscal rules. Large nega-tive growth surprises in euro area countries should not trigger additional consolidation efforts, which would be self-defeating. Moreover, if deflation risks materialize and monetary policy options are depleted, the escape clauses in the fiscal framework may need to be used to respond. In Japan, aggressive monetary policy easing—the first arrow of Abenomics—has helped lift inflation and infla-tion expectations, and actual and expected inflation are progressing toward the 2 per cent target. Communica-tion by the Bank of Japan has been effective, but more could be done to help anchor expectations, including clarifying the indicators used to assess whether infla-tion is on track. This effort would also help guide expec-tations when a need arises to adjust the asset purchase program and facilitate preparations for eventual exit. Should actual or expected inflation stall or growth dis-appoint, further action by the Bank of Japan would be warranted—but it would be essential that such action be accompanied by complementary growth enhanc-ing reforms, partly because of potential risks to finan-cial stability. On the fiscal front, given very high public debt, implementation of the second consumption tax increase is critical to establish a track record of fiscal dis-cipline but is likely to take a toll on domestic demand, underscoring the importance of a pickup in confidence and investment. In the US, with growth expected to increase above trend in the remainder of 2014 and 2015, the main policy issue is the appropriate speed of monetary policy nor-malization. Under the IMF staff’s baseline projection, the current plans—namely, ending asset purchases later this year and gradually increasing the policy rate starting in mid-2015—are appropriate, given the still-siz-able output gap and subdued inflation. But the timing of the increase in the policy rate may have to be adjusted based on developments on the inflation and unemploy-ment fronts. Two factors complicate efforts to assess the amount of slack in the economy: it is difficult to de-termine how much of the decline in labor force partici-pation is cyclical, and uncertainty exists about the equi-librium rate of unemployment. With the labor market strengthening more rapidly than forecast and inflation, although low, beginning to rise, risks of persistently low inflation have decreased, and the likelihood is arguably higher that policy interest rates could rise faster rela-tive to the WEO baseline on account of reduced slack.
  10. 10. 11 GLOBAL TRENDS SEPTEMBER - OCTOBER 2014 In this context, an effective communications strategy is essential to prevent disruptive market responses and anchor market expectations. On the fiscal policy front, the priorities should be avoiding short-term fiscal acci-dents caused by political brinkmanship and adopting a more growth-friendly approach to fiscal consolidation, including through front-loaded infrastructure spending, while reaching political agreement on a credible and de-tailed medium-term fiscal consolidation path. The recovery in other advanced economies is becoming stronger, with buoyant house prices posing policy chal-lenges in some of them. In the UK, for example, macro prudential tools have been deployed to contain finan-cial stability risks. Tighter monetary conditions could also be considered if macro prudential tools prove in-effective at addressing financial stability concerns, but careful consideration would need to be given to the trade tradeoff between damage to the real economy and the ultimate costs of financial vulnerabilities. Disinflation and the Domestic Situation Global disinflation will benefit India in its long battle against high inflation. Lower crude oil prices will also bring down the fuel subsidy bill in the government budget as well as cut the import bill. India has had a rel-atively smoother ride than many other emerging mar-kets in recent weeks. The rupee has been relatively sta-ble against the dollar. Equity prices have not yet been hit with a brutal wave of selling. The immediate benefits of global disinflation for India are obvious: it will help re-duce the economic imbalances that were built up over the past decade. The advantages over the longer term to economic growth are less clear. India is more inte-grated with the world economy than it previously was because of a growing ratio of trade-to-gross domestic product. The rate of economic expansion in India is now more tightly correlated with global economic growth than it was a decade ago. Indian policy makers are cur-rently in a relatively relaxed mood because of the sud-den relief they have got from falling energy prices. The next year may not be so benign if there is a global liquid-ity shock. The key challenge will be how to sustain the fragile economic recovery at a time when the rest of the global recovery is faltering.
  11. 11. DOMESTIC TRENDS Making ‘Make in India’ Happen For that, the Government needs to tackle issues impacting ease of doing business The manufacturing sector has exhibited a tenta-tive revival after three years of subdued growth, registering 3.5 per cent growth in the first quar-ter of the year. However, this revival cannot be taken for granted. India is the only country with a young, growing and competitive workforce. A strong and deep manufactur-ing foundation with capabilities across traditional and advanced technology sectors is the springboard for the next growth cycle. Indian companies have proved to be globally attuned and energetic in leveraging compara-tive advantages. With the many free trade agreements that India has signed, the manufacturing sector has a good chance to slot into global supply chains. India can easily reach annual manufacturing growth ECONOMY MATTERS 12 rates of 12-14 per cent over a sustained period of time under the right conditions. However, even a growth rate of just over 6 per cent would need an additional manufacturing investment of Rs. 98 lakh crore at cur-rent prices over the next five years. To attract such in-vestment, the right policy structure is essential. Right Approach Government and industry have already commenced concerted efforts to enhance the ease of doing busi-ness and kick-start manufacturing growth. The Govern-ment has also relaxed FDI limits in critical sectors like defence, construction and railways. Estimates suggest that India could achieve an additional Rs. 8 lakh crore of GDP and 25 million more jobs through a facilitative business environment. There also needs to be a review of labour laws, many of which are outdated in the current context. The Goods and Services Tax will be a huge step forward in making India a single market. Land acquisition for industrial development must be speedy and cost effective while simultaneously leaving displaced populations better off. Of course, the action at the grassroots level of State governments and dis-trict administrations will be critical.
  12. 12. This article appeared in Hindu Business Line dated 24th September 2014. The online version can be accessed from the fol-lowing link: http://www.thehindubusinessline.com/opinion/making-make-in-india-happen/article6442477.ece Industrial Output Trajectory Remains Subdued 13 DOMESTIC TRENDS SEPTEMBER - OCTOBER 2014 The operating environment for the micro, small and medium enterprises sector needs to be strengthened. Access to finance, redefining investment limits, encour-aging technology adaptation and facilitative regulation could transform MSMEs into the hotspot of entrepre-neurial activity. Finally, firm level competitiveness must be encouraged by building a comprehensive support system with a wide knowledge base across parameters like quality management systems, lean manufacturing and envi-ronmental assessments and audits to meet the require-ment of ‘Zero defect, zero effect’ as enunciated by the Prime Minister. Confidence-Building Some 153 mega projects with an investment of around Rs. 5.2 lakh crore are being monitored by the Project Monitoring Group, which will create better infrastruc-ture and ease cost pressures. India must also sync trade agreements with domestic manufacturing strengths and leverage global markets. In particular, exports must be stepped up in highly-traded sectors such as electron-ics and machinery. Industrial output growth remained unchanged at 0.4 per cent in August 2014 from July 2014. In the year so far (April to August), IIP growth has been higher at 2.8 per cent compared to ‘near zero’ in the same period of last year. Manufacturing output contracted in August 2014 for the second month in a row. In addition, capi-tal goods output – with 9 per cent weight in the index - also fell by 11 per cent. Going forward, the upcoming Certain industry sectors of strategic significance could help set the stage for future growth in alignment with global trends. For example, a policy on capital goods and engineering, coupled with rationalisation of taxes and duties and correction of anomalies, will promote the competitiveness of Indian equipment manufactur-ers. The Information Communication Technology & Electronics (ICTE) sector is critical as currently over 60 per cent of the domestic demand is being met through imports. The steel industry has huge potential. The sector would benefit from the introduction of compact designs for steel plants, creation of a larger pool of metallurgists, and promotion of R&D. Measures for the iron ore min-ing sector such as expanding the iron ore reserve base and modern mechanised mines would also need to be addressed. Emphasis on establishing textile mega parks, special incentives for value added textile and ap-parel manufacturing, and export promotion are neces-sary. The Prime Minister’s call to ‘Make in India’ itself imparts confidence to the industry to undertake new investments. festive season holds some respite for the industry, es-pecially the consumer goods sector, where a seasonal pick-up could aid sales. The sequential momentum as indicated by the movement in the seasonally-adjust-ed month-on-month series too showed that indus-trial output growth declined in August 2014 (from 0.2 per cent in July 2014 to -1.0 per cent in August 2014).
  13. 13. ECONOMY MATTERS 14 DOMESTIC TRENDS The core sector output moderated to 8-month low in September 2014 on the back of dwindling production of crude oil, fertilizer and natural gas. The eight core industries comprise nearly 38 per cent of the weight of items included in the Index of Industrial Production (IIP). The combined Index of eight core industries stood at 160.6 in September, 2014, which translates into 1.9 per cent growth on y-o-y basis as compared to 5.8 per cent growth in August 2014. Its cumulative growth dur- On the sectoral front, output of the manufacturing sec-tor, which constitutes over 75 per cent of the index, de-clined to -1.4 per cent in August 2014 as compared to contraction to the tune of 1.0 per cent in the previous month, despite a low base of last year. In terms of in-dustries, eleven (11) out of the twenty two (22) industry groups (as per 2-digit NIC-2004) in the manufacturing sector showed positive growth during the month of ing April to September, 2014-15 was 4.0 per cent as com-pared to 5.0 per cent in the same period last year. Coal production (weight: 4.38 per cent) increased by 7.2 per cent in September, 2014 over August, 2013. Going for-ward, coal production growth is likely to moderate due to the recent Supreme Court verdict canceling all but four coal blocks. The production of crude oil, natural gas, fertilizer, refinery products declined in September 2014. August 2014 as compared to the corresponding month of the previous year. The industry group ‘Basic metals’ showed the highest positive growth of 19.1 per cent, fol-lowed by 14.3 per cent in ‘Other transport equipment’ and 10.9 per cent in ‘Luggage, handbags, saddlery, har-ness & footwear; tanning and dressing of leather prod-ucts’. On the other hand, the industry group ‘Radio, TV and communication equipment & apparatus’ showed
  14. 14. 15 DOMESTIC TRENDS SEPTEMBER - OCTOBER 2014 the highest negative growth of (-) 48.8 per cent, fol-lowed by (-) 43.9 per cent in ‘Office, accounting & com-puting machinery’ and (-) 17.8 per cent in ‘Electricity ma-chinery & apparatus n.e.c.’. Meanwhile, electricity generation remained was robust at 12.9 per cent growth in August 2014, up from 11.7 per cent in July as delayed rainfall in large parts of India led to higher electricity demand. Mining output also con-tinued to expand in August (by 2.6 per cent compared to 1.2 per cent in July). Going forward, we expect the electricity production growth to somewhat taper down due to shortfall in coal supply. In addition, the Supreme Court ruling on cancellation of coal blocks allocations to 214 mines could see some impact on mining sector growth in the interim. From the use-based perspective, consumer goods pro-duction continued to remain in negative territory. The major part of the contraction in consumer goods was primarily on account of sharp drop in consumer dura-bles by 15.0 per cent. Acute rainfall deficiency during the initial phase of the monsoon season (about 30 per cent average during June to August) has likely to have dented farm incomes and hence demand for consumer durables. The negative print for non-durables during the month was also worrying. Moreover, the volatility in capital goods continued and the sector contracted by 11.3 per cent in August 2014 as compared to decline to the tune of 3.9 per cent in the previous month. Mean-while, basic goods production remained strong at 9.6 per cent in August 2014 and was a silver lining in the overall use-based indices. Outlook IIP data for the month of August 2014 shows that industrial production continues to be in the slowdown phase and a visible turnaround in industrial growth is still not happening. And if we factor in the base effect, the performance of industry shows that demand is yet to show distinct signs of a pick-up. What is worrisome is the poor perfor-mance of the manufacturing sector which continues to be under stress as new orders are not forthcoming in a big way. The negative growth of the capital and consumer goods sector, especially consumer durables, need interven-tions. There is need for taking cognizance of the slow growth of industrial production and take steps to revive in-vestment and stimulate demand in the economy. This would entail expediting execution of approved projects and providing a competitive market for coal and mining sectors. Recent announcements and policy actions like ‘Make in India’ initiative, ensuring flexible labour policy, etc should help the turnaround.
  15. 15. Inflation Moderates Sharply in September 2014 ECONOMY MATTERS 16 DOMESTIC TRENDS WPI based inflation continued its downward trajectory as it moderated further to 2.4 per cent in September 2014 from 3.7 per cent in the previous month. The fall in WPI inflation was attributable to all round modera-tion in all its sub sectors. Retail inflation (as measured by CPI) too fell to 6.5 per cent in September 2014 – the lowest level since January 2012 when the new inflation series started - from revised 7.7 per cent in August 2014. This was mainly driven by a fall in food inflation (fell to 7.7 per cent from 9.4 per cent in August). Moreover, fuel CPI slipped to another record low of 3.5 per cent aided by a sharp decline in global crude prices as well. Primary inflation moderated further to 2.2 per cent in September 2014 from 3.9 per cent in august 2014. Part of the moderation was driven by a high base of last year. Primary food inflation too eased to 3.5 per cent from 5.2 per cent in the previous month. Notably, food inflation has come down sharply in the last couple of months, thanks to proactive steps taken by the govern-ment such as release of food grain stocks, low increase in minimum support prices etc. Amongst primary food prices, the data showed that vegetable prices have come down sharply to -14.9 per cent in September 2014 from -4.8 per cent in August 2014. In contrast, inflation in fruits has remained relatively firm at 20.9 per cent in the reporting month as compared to 20.3 per cent in August 2014. Primary non-food inflation decelerated sharply to 0.5 per cent in September 2014 from 4.2 per Core CPI inflation (excluding food and fuel inflation fell from 7.0 per cent in August 2014 to 6.0 per cent in Sep-tember 2014. Core inflation fell across all categories in the month driven by a decline in transport & communi-cation (fell by 2.2 ppt) and household requisites (fell by 1.5 ppt). Both of these categories, (together having a weight of 30 per cent in the core CPI index) favourably benefited from a very strong base effect from Septem-ber last year. For 4 consecutive months CPI inflation has been at or below the RBI’s target of 8 per cent for Janu-ary 2015. cent in the previous month. This is its lowest reading since March 2012. Amongst non-food articles, inflation in fibres and minerals was the main driving force behind the moderation. Fuel inflation too decelerated sharply to 1.3 per cent in September 2014 as compared to 4.5 per cent in the previous month, benefitting from a favourable base ef-fect. Fuel prices came off sharply tracking a fall in global Brent crude prices, which is now trading at a two-year low. Inflation in petrol declined to 9.4 per cent from -0.2 per cent in August 2014. In an interesting development, in October 2014, government de-regulated the price of diesel and announced a new price for domestically-produced natural gas. The price of diesel, like petrol, would now stand linked to the market without any gov-ernment intervention, with retail rates reflecting price
  16. 16. Outlook Over the next 2 months, headline CPI inflation could ease further due to a base effect from last fiscal, lower crude oil prices, revival of monsoon, proactive measures taken by the government to keep food prices under control, and a stable currency. However, factors such as improvement in demand conditions and rising geopolitical tensions reversing the current decline in oil prices can derail this moderation in the coming months. RBI Maintains ‘Status-Quo’ on Policy Rates 17 DOMESTIC TRENDS SEPTEMBER - OCTOBER 2014 changes in the global market. The immediate impact on diesel will be a reduction in prices by Rs 3.37 a litre. Manufacturing inflation eased further to 2.8 per cent in September 2014 as compared to 3.5 per cent in the pre-vious month. Encouragingly, non-food manufacturing or core inflation, which is widely regarded as the proxy In its fourth bi-monthly monetary policy review held on 30th September, 2014, RBI maintained status quo on all key rates citing continued risks to inflation and difficult external situation especially on the geopolitical front. According to the minutes of meeting of the Technical Advisory Committee, RBI, if the pace of disinflation is faster than what is anticipated now, then there may be a case for a rate cut, particularly if inflation expectations also soften. for demand-side pressures in the economy, moderated to 2.8 per cent during the month as compared to 3.5 per cent in August 2014. In the coming months, we expect core WPI to hover around 3.0-3.5 per cent, RBI’s com-fort level for this inflation measure. Manufacturing food inflation too showed a deceleration during the month. With this the repo rate stands at 8.0 percent, the re-verse repo rate at 7.0 per cent, the marginal standing fa-cility (MSF) rate and the Bank Rate at 9.0 per cent. The cash reserve ratio (CRR) of scheduled banks remains at 4.0 percent of net demand and time liabilities (NDTL), although the liquidity provided under the export credit refinance (ECR) facility has been reduced from 32 per cent of eligible export credit outstanding to 15 per cent with effect from October 10, 2014. Additionally, the RBI
  17. 17. ECONOMY MATTERS 18 DOMESTIC TRENDS will continue to provide liquidity under overnight repos at 0.25 per cent of bank-wise NDTL at the LAF repo rate and liquidity under 7-day and 14-day term repos of up to Since June 2014, headline inflation has ebbed to levels which are consistent with the desired near-term glide path of disinflation - 8 per cent by January 2015. The most heartening feature has been the steady decline in inflation excluding food and fuel, by a cumulative 111 ba-sis points since January 2014, to a new low. With interna-tional crude prices softening and relative stability in the foreign exchange market, some upside risks to inflation are receding. Yet, there are risks from food price shocks as the full effects of the monsoon’s passage unfold, and from geo-political developments that could materialize rapidly. For the near-term objective the risks around the baseline path of inflation are broadly balanced. Turning to the medium-term objective (6 per cent by January 2016) the balance of risks is still to the upside, though somewhat lower than in the last policy statement. On the growth front, with the improvement in business confidence and investment demand, real GDP growth is expected to pick up in the final quarter of 2014-15, aided by modestly firming global recovery supporting exports and the ongoing search for yields in international finan-cial markets spurring capital inflows. As per the RBI, elevated inflation expectations of households and risks from still-high input costs and sticky wages, however, present challenges to bringing down inflation to 6 per- 0.75 per cent of NDTL of the banking system through auctions while continuing with daily one-day term repos and reverse repos to smooth liquidity. cent by January 2016 along the committed glide path. The key to a turnaround in the growth path is a revival in investment activity supported by fiscal consolidation, stronger export performance and sustained disinfla-tion. With expectations of these conditions remaining broadly unchanged, the RBI has retained projection of growth for 2014-15 at 5.5 per cent. As per the RBI, liquidity conditions have remained broadly balanced through the second quarter of 2014- 15, except for transient tightness in the second half of July and early August due to delayed government ex-penditure. With credit growth falling well below depos-it growth in August and September, structural sources of liquidity pressures also eased. The average recourse to liquidity from the Reserve Bank, measured by daily net liquidity injection through LAF, term repo and MSF, decreased from Rs. 870 billion in July to Rs. 795 billion during August and further to Rs. 450 billion during Sep-tember. The credit market has been subdued through the sec-ond quarter; with non-food credit growth decelerating on account of risk aversion related to asset quality as well as weak demand in general. With deposit growth remaining largely flat, a decline in credit growth led to
  18. 18. CII Reaction By all indications, the twin deficits—fiscal and current account—are well under control and core inflation has been trending downwards. On the other hand, industrial production has been muted. This could have been a good opportunity for RBI to reduce rates. The infusion of liquidity at this juncture, through a reduction in policy rates, would have provided an impetus to the feel-good factor brought on by the recent burst of policy announcements by the government. Trade Deficit Widens on Strong Growth in Imports 19 DOMESTIC TRENDS and higher funding has been obtained from non-bank sources. The corporate bond market recorded a pick-up in activity during the second quarter with an increase in offerings of public issues and rights issues, partly re-flecting tightening bank credit conditions. During 2014- 15, term deposit rates and weighted average lending rates (WALR) have softened marginally. SEPTEMBER - OCTOBER 2014 a negative wedge (since August 2014) between credit and deposit growth, indicative of an increase in avail-ability of structural liquidity with banks. The estimated growth rate of bank credit of schedule commercial banks for 2014-15 is 14.8 per cent. Mirroring the slowing of bank credit growth, the flow of financial resources to the commercial sector has been lower than a year ago Exports maintained its muted growth even in Septem-ber 2014 at 2.7 per cent as compared to 2.4 per cent re-corded in the previous month. In cumulative terms, ex-ports grew by 6.5 per cent in the second quarter of the current fiscal (July-September 2014). Given that the In-dian currency has remained broadly stable for the past few months, global growth prospects have become an important variable for exports. Growing concerns re-cently about growth recovery globally may pose risks to exports going ahead. At a disaggregate level, some of the important commodities that witnessed relatively strong growth during September 2014 were engineer-ing goods (20.2 per cent), textiles (15.9 per cent), gems and jewellery (11.1 per cent) etc. The slowdown in ex-ports was driven by a sharp decline in exports of petro-leum products (decline by 13.3 per cent) and electronic goods (decline by 17.4 per cent). In contrast, imports grew at 26 per cent – their fastest pace in 2.5 years in September 2014 as compared to 2.1 per cent recorded in the previous month. Despite an over US$10 per barrel decline in crude oil prices, oil im-ports rose by 9.7 per cent during the month due to high-er import volumes. Oil imports during April-September, 2014-15 were valued at US$ 82.5 billion which was 3.1 per cent higher than the oil imports of US$80.0 billion in the corresponding period last year. Non-oil imports also grew by staggering 36.2 per cent in September 2014 due to both higher gold and well as higher core (non-oil non-gold) imports. Gold imports increased to US$3.75 billion September 2014 – the highest monthly imports since curbs were imposed last August. Higher demand spurred by the upcoming festive season and low prices is likely to have led to the rise in imports of the yellow metal. Non-oil imports during April-September, 2014-15 were valued at US$151.6 billion which was 0.8 per cent higher than the level of such imports valued at US$150.5 billion in April-September, 2013-14.
  19. 19. CII Business Confidence Index Shoots Up Second Time in a Row ECONOMY MATTERS 20 DOMESTIC TRENDS Underpinned by a sharp growth in imports as compared to exports during the month, trade deficit widened sharply to US$14.3 billion in September 2014 as com-pared to US$ 10.8 billion in August 2014. This is the high-est monthly deficit since June 2013. The services trade data released for the month of August 2014 showed that exports had contracted by 0.5 per cent after 7 consecutive months of positive growth. Imports on the other hand grew by 7.5 per cent taking the services bal-ance for August to US$5.5 billion as compared to US$6.5 billion in July. Outlook Prospects for exports may not remain very robust amid the backdrop of growing concerns about global recovery. However, the outlook for the current account deficit remains benign for now given that global crude oil prices have declined sharply and there is stability in our currency, which may mitigate any adverse impact of an export slowdown. Indicating a sharp improvement for the second con-secutive quarter, the CII Business Confidence Index (CII-BCI) for July-Sept quarter FY15 shot up to 57.4, up from 53.7 in April-June quarter and 49.9 in Jan-March quarter this year. During the same quarter last fiscal, the index had touched the all-time low value of 45.7. The number 50 is the dividing line on the index between positive and weak business confidence. Commenting on the upward march in the value of in-dex, Mr. Chandrajit Banerjee, Director General, CII, said that “the determination shown by the new government at the Centre to provide an impetus to growth along with reviving the ‘feel good’ factor has sent the busi-ness confidence index soaring for the second quarter in a row. In order to capitalize on the early signs of im-proving business sentiments, we must ensure that this momentum is maintained going forward.”
  20. 20. 21 DOMESTIC TRENDS SEPTEMBER - OCTOBER 2014 The 88th Business Outlook Survey is based on responses from over 150 industry members. Majority of the re-spondents (44 per cent) belong to large-scale sector, while medium scale companies comprise another 12 per cent. Around 38 per cent and 6 per cent respectively are from the small-scale and micro firms. Further, 60 per cent of the respondents are from manufacturing and 36 per cent are from the services sector. The highest percentage (41 per cent) of respondents expected GDP in the current fiscal to expand by 5.0- 5.5 per cent, up from sub-5 per cent growth witnessed in the last two years. In fact, 30 per cent respondents expected GDP to grow in a range of 5.5-6.0 per cent in FY15, which indicates that 6 per cent growth is within reach this year. We have already started this financial year on an impressive note with the first quarter GDP recording a growth of 5.7 per cent, up from 4.6 per cent in the previous quarter. WPI Inflation is expected to average 5.5-6.5 per cent in FY15, which is slightly on a higher side considering the likelihood of a sub-normal monsoon this year. “The management of inflationary expectations through supply-side measures would hold the key for ensuring continued momentum of economic revival”, suggested Mr. Banerjee. The expectation of higher economic growth in the cur-rent fiscal is rooted in optimism about the overall de-mand situation. A significant 77 per cent of the respond-ents expected their sales to increase in the July-Sep quarter, much higher than 50 per cent respondents in the previous quarter. Similarly, 49 per cent of the re-spondents expected their export orders to increase in July-Sep quarter compared to 39 per cent respondents in the previous quarter. The revival in domestic and global demand has resulted in a majority (46 per cent) of the surveyed businesses contemplating new investment in the July-Sep quarter, whereas only 10 per cent expected contraction. This in-dicates that economic recovery is sustainable, provided we maintain the demand momentum, where the mon-etary stance by the Central Bank will play a crucial role. The businesses, besides undertaking new investments, have started experiencing a rise in capacity utilization. Nearly half (49.5 per cent) of the respondent firms ex-pected their capacity utilization to exceed 75 per cent in July-Sep quarter of FY15, up from 34 per cent respond-ents in the previous quarter, which augurs well for the turnaround of the economy. CII survey has observed a sharp decline in the percent-age of respondents reporting increase in inputs costs related to raw materials, energy and employees in the Jul-Sep quarter as compared to the previous quarter, which is in line with the official data specifying the cur-rent moderation in inflation rate. Expectation of recovery in sales, coupled with sharp de-cline in input costs, has led to a rise in percentage of respondents expecting an increase in profits after tax (PAT) in the July-Sept quarter to 40 per cent as against 36 per cent in the previous quarter. On the other hand, the percentage of respondents reporting a decline in PAT between the two periods declined from 30 per cent to 20 per cent. A slow pick up in global demand, high inflation and ris-ing borrowing costs are cited to be the top three con-cerns of the respondents. “While we can do little about addressing the global slowdown concern, all policy op-tions must be explored to tackle the problem of infla-tion and high borrowing cost. At a time when economic recovery needs to be strengthened, the ideal policy in-strument would be to manage inflation through supply-side measures, and make a direct intervention to reduce borrowing costs”, added Mr. Banerjee.
  21. 21. ECONOMY MATTERS 22 DOMESTIC TRENDS Other Developments During the Month • Festive Season Heralds a Jump in Passenger Vehicle Sales: Passenger vehicle sales increased by 3.3 per cent on year on year basis during September 2014 to 223,568 units, according to data released by the Society of Indian Automobile Manufacturers (SIAM). September’s sales were also up 4.5 per cent from the August total of 213,915 units. Automakers in India sold 1.93 million passenger vehicles during the first nine months of 2014, making a slim increase of 834 units over sales levels in the same period last year. The biggest change in monthly sales came in the form of growth leadership by utility vehicles (UVs) as car sales actually dipped in September 2014. Sales of passenger cars stood at 154,882 units, marking a 1 per cent decline, while sales of vans continued to remain lower with a 10.7 per cent drop to 15,683 units. However, this weakness was offset by a sharp 24.9 per cent surge in shipments of UVs to 53,003 units. • Government Deregulates Diesel Prices: The Cabinet has decided to completely deregulate the price of diesel. Henceforth, the price will be linked to the market. Over the last five years, prices of diesel have significantly gone up. But given the crude price today, diesel prices would stand to be reduced after being market-linked. On an immediate basis, this move of the government will result in a Rs 3.37 a litre cut in retail rate of India’s most consumed fuel. The staggered diesel price hike initiated since September 2012 and the recent drop in crude prices in global markets have converted under-recovery (difference between retail price and its imported cost) of public sector oil marketing companies into an over-recovery (profit). The over-recovery on diesel for such companies reached Rs 3.56 a litre for the first fortnight of October. Hence, as the crude prices in global market are likely to remain low in the near term due to the US’ discovery of shale oil as also the struggling economies of Europe and Asia, deregulating diesel prices is both the right and opportune step. • Labour Reforms Launched: In a bid to simplify labour reforms in the country for making ‘doing business’ attrac-tive in India, Prime Minister Narendra Modi launched the ‘Pt. Deendayal Upadhyay Shramev Jayate Yojana’. A string of measures would aim to make inspection of businesses transparent and also ease rules so that employees can smoothly move their social security funds when they change jobs. A new website, managed by the labour ministry, will allow companies to fill forms online and raise their grievances. The 1,800 labour in-spectors will no longer have the powers to decide on the premises they would survey. Instead, a computerized system will randomly, based on data and objective criteria, identify the companies to be inspected. Further, the inspectors will have to upload their inspection reports within 72 hours and can’t modify them thereafter. The World Bank says India has one of the world’s most rigid labour markets, but fears of a trade union backlash and partisan politics have deterred successive governments from reform measures. Hopefully, these strings of measures will help improve the business investment environment in the country. • New Chief Economic Advisor: Arvind Subramanian, Senior Fellow at the Peterson Institute for International Economics, has been appointed as India’s new chief economic adviser (CEA). The CEA, a post that has been lying vacant since September last year after Raghuram Rajan took over as new Reserve Bank of India (RBI) governor, is usually the main go-to person for advice for the finance minister on macro-economic matters and primary responsibilities, among others, include authoring the mid-year analysis and the Economic Survey. Dr. Subramanian has obtained his undergraduate degree from St. Stephens College, Delhi; his MBA from the Indian Institute of Management at Ahmedabad, India; and his M.Phil and D.Phil from the University of Oxford, UK. • New Economic Affairs Secretary: Rajiv Mehrishi will be the new Economic Affairs Secretary in the Ministry of Finance. He replaces Arvind Mayaram who has been transferred to the Tourism Ministry. Previously, Mr. Mehrishi was the Chief Secretary in the Rajasthan Government and has been credited for introducing several important reforms in the state. • New Base for National Accounts: In accordance with the recommendation of the National Statistical Commis-sion to revise the base year of all economic indices every five years, it has been proposed to revise the base year of national accounts from 2004-05 to 2011-12 in 2015. As earlier, the new base year has been selected in line with the latest Quinquennial round of Employment-Unemployment Survey. The new series of national ac-counts is tentatively scheduled for release on January 31, 2015.
  22. 22. CORPORATE PERFORMANCE Corporate Performance in Q2FY15 23 SEPTEMBER - OCTOBER 2014 Second quarter earnings of companies show that a sustained recovery in earning growth remains elusive. In fact, net sales of companies (manufac-turing plus services) grew at the slowest pace in four quarters at 11.4 per cent, slower than 13.8 per cent in the preceding June quarter, and the 14.9 per cent growth in the year-ago September quarter. Our analysis is based on the financial performance of 246 companies (146- Manufacturing and 100 Services and excludes oil & gas companies), using a balanced panel, extracted from the Ace Equity database. However, it is encouraging to note that the belea-guered manufacturing sector witnessed acceleration in sales growth in the second quarter of the current fiscal as compared to the same period last year. Net sales of manufacturing sector in the second quarter grew by 11.8 per cent as compared to 8.3 per cent in the same period last year, indicating that the downtrend is over. We ex-pect further improvement in growth performance dur-ing the current fiscal on the back of the slew of policy measures which the new government has introduced in the recent months to spur investment and revive growth. The net sales of services sector in the second quarter though moderated to 11.2 per cent as compared to robust 19.6 per cent in the same quarter previous year. Its pivotal for the services sector sales growth to pick-up in the coming quarters as its revival is critical for facilitating the overall acceleration in economic growth.
  23. 23. ECONOMY MATTERS 24 CORPORATE PERFORMANCE The expenditure costs of the firms, on an aggregate ba-sis, accelerated by 13.0 per cent in the reporting quar-ter, as compared to 11.8 per cent in the comparable time period last year. Under its various heads, growth of raw materials cost increased by 16.5 per cent over a paltry 5.6 per cent growth in the same period last year. In contrast, growth in wages & salaries showed modera-tion. Total expenditure costs for manufacturing sector also increased by 16.3 per cent in the second quarter of 2014-15 as compared to 4.1 per cent growth in the same quarter last year. All the heads of expenditure for man-ufacturing except interest cost accelerated during the quarter. In contrast, total aggregate expenditure costs for services sector moderated by 10.9 per cent in the reporting quarter as compared to 17.2 per cent growth in the same quarter a year ago. The performance analyzed in terms of Profit after Tax (PAT) exhibits an improvement in financial results of companies at aggregate level in the second quarter of the current financial year. On an aggregate basis, growth in PAT improved significantly to 17.9 per cent in the second quarter as compared to growth to the tune of 14.9 per cent in the same quarter of last year. This has been driven by sharp improvement in PAT growth of manufacturing sector. PAT growth across the manufac-turing sector firms, improved sharply to 25.5 per cent in the second quarter as compared to decline of 8.5 in the same quarter of previous year. For services sector, PAT growth moderated to 15.7 per cent as compared to healthy 24.3 per cent in the same quarter a year ago.
  24. 24. 25 CORPORATE PERFORMANCE SEPTEMBER - OCTOBER 2014 In sum, there is no cause for cheer yet in the Q2 earning for the companies. However, since our analysis is based on small sample of firms, it is too early to say anything conclusively. The emerging signs though remain propi-tious, with the new government announcing a slew of reform measures in the last few months
  25. 25. SECTOR IN FOCUS MSME Introduction India is to emerge as one of the leading economies over the next decade in light of a positive political and eco-nomic scenario, and the Micro, Small & Medium Enter-prises (MSME) segment is expected to play a significant role. The development of this segment is extremely critical to meet the national imperatives of financial in-clusion and generation of employment in urban, rurban and rural areas. Further, it can nurture and support new age entrepreneurs who have the potential to create globally competitive businesses in India. With domestic and foreign companies investing in the ‘Make in India’ initiative, MSME can be the mainstay for existing and future high-growth businesses and make substantial impact in the area of indigenization. Make in India with zero defect and zero effect, is a significant opportunity. The new wave MSME should be able to de-velop an ecosystem that enables and continuously sup-ports business gearing to deliver the right product, the ECONOMY MATTERS 26 right quality, the right solution and the right service at a competitive price, in domestic and international mar-kets. The Digital India revolution, too, provides a great opportunity to promote MSME participation in the In-formation, Communication and Telecommunication (ICT) sector, in line with the government vision. It is equally important that the MSME segment devel-ops in all areas of agriculture, manufacturing and ser-vices sectors, as each of these sectors will continue to be very relevant to both the overall GDP growth as well as employment generation. The MSME sector will act as a catalyst to bring about this socio-economic trans-formation. The following section reviews the MSME sector, based largely on the Report “The New Wave Indian MSME: An Action Agenda for Growth” prepared by the Confed-eration of Indian Industry (CII) and KPMG. The report, which was released in October 2014, explores and as-sesses the growth drivers and challenges for the sector. Growth Opportunity for MSME The GDP growth rate is likely to achieve 8.5 per cent lev-el and India is expected to be an approximately USD 5 trillion economy by the year 2025. Given the right set of
  26. 26. 27 SECTOR IN FOCUS SEPTEMBER - OCTOBER 2014 support and enabling framework, the MSME segment has the potential to emerge as a backbone for this econ-omy and act as an engine for growth. The MSME op-portunity is to develop entrepreneurship and support growth led by innovation over the next decade by: • Significantly increasing the share of MSME contri-bution to GDP from the current 8 per cent to 15 per cent by 2020; • Generate employment levels to the extent of 50 per cent of the overall employment representing 300 million jobs across agricultural, manufacturing and services sectors; and • Increase the share of MSME contribution across key public and private industry sectors, fulfilling in-creasing domestic demand, growth in exports, indi-genization and import substitution. Employment Opportunities With the increase in MSME contribution to the GDP, there is a potential for increasing its contribution to em-ployment to over 50 per cent over the next decade. It is also vital for the informal MSMEs who are currently not registered need to be made part of the formal MSMEs ecosystem. Growth incentives in the form of privileges Share of MSME in the Economy There are approximately 46 million Micro, Small and Medium Enterprise sector enterprises across various industries, employing 106 million people. Overall, the MSME sector accounts for 45 per cent of Indian indus-trial output and 40 per cent of exports. While most of the sector is un-organized (approximately 94 per cent), informal and un-registered, initiatives to have more en-terprises registered are well underway. The contribution of the MSME sector to India’s GDP cur-rently stands at ~8 per cent for 2011-12, and is growing at a rate higher than the projected GDP growth rate. The contribution of the MSME segment to GDP in some of the global economies is in the 25 per cent to 60 per cent range. MSME sector in India has the potential to increase the share of contribution to GDP from current 8 per cent to about 15 per cent by the year 2020. and direct benefits for the MSMEs will encourage reg-istration and participation in the growth opportunity. Typically, MSME sector can provide comparatively larg-er employment opportunities at comparatively lower capital cost especially in the rural and remote areas, by becoming part of the industrial ecosystem and act as ancillary units for large enterprises to support the sys-tem in growth.
  27. 27. ECONOMY MATTERS 28 SECTOR IN FOCUS India needs to create 10 to 15 million job opportunities per year over the next decade to provide gainful em-ployment to its population, as per an estimate by Plan-ning Commission. Current MSME employment is at 28 per cent of the overall employment. The MSME sector is one of the key drivers for India’s transition from an agrarian to an industrialized econo-my. It is also critical to see that adequate growth is met across services, manufacturing and agriculture seg-ments to ensure holistic and stable overall economic growth. The current growth of MSME is non-uniform and there exists a significant gap in growth of enter-prises across services and manufacturing sectors. Steps to lower this gap must be taken for a balanced growth outlook. Export Potential The contribution of the services, manufacturing and agricultural to the overall exports from India is fairly skewed. While export of services led by IT and ITeS sec-tors have grown significantly in the last decade, the con-tribution from manufacturing output has been largely stagnant. India’s share of services exports in world ex-ports of services was 3.3 per cent in 2011 and has been increasing faster than the share of Indian merchandise exports in world exports. During 2012-13, Indian mer-chandise exports showed a slight negative growth rate of around 2 per cent as compared to a positive growth of 21.9 per cent during the financial year 2011-12. The share of MSMEs in India’s total exports was estimat-ed to be around 40 per cent in 2011-12. While globaliza-tion presented a number of challenges for the manufac-turing MSMEs, it also opened up ample opportunities to shore up the growth of the manufacturing sector. India can seize the opportunities provided by the dynamics of globalization which has resulted in a dramatic shift of manufacturing to developing countries over the last decade. India can significantly diversify its export port-folio, both in terms of products and goods exported as well as regional coverage. Enabling Opportunity Frame-work for MSMEs The new wave Opportunity framework will have to con-sider the following elements in a cohesive and synergis-tic manner. At different stages of growth, enterprises need support and assistance in various aspects. Oppor-tunity framework should be designed based on maturi-ty stage and scale of enterprise i.e. start-up, growth, de-veloping and should encompass all aspects of support for MSMEs. The framework can be built around five growth enabling pillars, viz. infrastructure, regulatory, funding, performance incentives and skill India. The var-ious measures to be undertaken under these five broad heads are summed up below: (1). Infrastructure 1. Allocating 25 per cent of the land available at all In-dustrial Corridors for MSMEs at different rate slabs and acquiring models. This will help MSMEs to start their business ventures at affordable rates in key in-dustrial parks and clusters. 2. World class infrastructure at national, regional and
  28. 28. 29 SECTOR IN FOCUS SEPTEMBER - OCTOBER 2014 industry specific clusters and business centres (on the lines of “polyclinics”) for MSME in PPP model comprising physical infra, knowledge infra (crea-tion of tool rooms), e-platforms, B2B access and technology and innovation support for MSME. Link-ing all stakeholders in MSME eco system i.e. bank-ers, large MNCs, global markets customers, equity investors, skill development, research and develop-ments institutes, trade associations etc. with clus-ters and MSME participants in the region. 3. IT development and implementation in MSME Clusters (similar to the Quality Development Clus-ter Movement). Implement the Cloud technology among MSME Clusters which can help MSMEs in knowledge sharing and competitiveness develop-ment. 4. Clusters alongside infrastructure in 100 modern cit-ies/ township, rurban and rural areas and the invest-ments in road, rail, air and water to provide greater connectivity for MSME businesses. 5. Incubation cells and hubs within clusters in collabo-ration with academia / regional institutions to pro-vide MSMEs with mentoring and technology sup-port, and shared R&D facilities. (2). Regulatory 1. Single comprehensive MSME Law for India, appli-cable in all states and territories and to all MSMEs; including Labour Law, Factories Act, Land acquisi-tion Act, etc. Single window approval allow entre-preneur and his/her MSME(s) to register their busi-ness, obtain required licenses, PAN etc. through a single application for setting up business and easy facilitation of IP registrations. Annual Filing and Declaration to file taxes and other regulatory com-pliances, licenses, etc. in order to reduce adminis-trative time and effort in meeting compliances on monthly, quarterly basis. 2. Financial regulation to support on matters of: •Effective policy to deal with delayed payments to MSME by large companies on a timely basis. Mandatory 60 day dispute resolution mecha-nism for SME comprising 30 day fact finding window and 30 day clearance window. •Exit policy for MSME sector (on the similar lines of the Chapter 11 of the United States Bankruptcy Code) which can help MSMEs to exit the business without any personal finan-cial loss, and entrepreneurs should be given a second chance. 3. National procurement policy for public and private enterprises for specified areas in each industry sector and incentives for vendor development for large companies and MSME clusters. 4. Export promotion schemes for MSMEs, need for continuity, simplification, effective utilization and assistance in processing of the benefits through effective implementation of IT platforms thereby increasing the ease of doing business. 5. Direct and indirect tax benefits by way of Zero Tax for the first 5 years (Micro Enterprises); 10 per cent Tax slab for 10 years (Small Enterprises); 15 per cent Tax slab for 15 years (Medium Enterprises). (3). Funding 1. Open environment and incentives for investments by HNWI and funds into MSME business as well in-centivize debt funding in MSME segment by reduc-tion in direct tax rates on income / profits generated by funding MSME segment. Incentives for incuba-tion fund, early stage fund, and MNC sponsored early stage incubation fund by tax exemptions for capital gains from investments made. Permit 200 in-vestors in a single company and Rs 20 to 50 crores equity through non-regulated crowd funding. Upto 10 per cent of tax liability by HNWI in registered and approved MSMEs to be considered as discharge of tax liability. Government can initiate an Innovation fund to support private funds for investing in in-novation with 30 per cent funding sponsorship by Government. 2. Incentivize the bank by making lending to MSME more manageable and profitable for banks: - Provide capital adequacy norms support through recognition of MSME credit ratings program for each sector; rationalise interest rate and margin requirements for MSME who adopt credit rating programme.
  29. 29. ECONOMY MATTERS 30 SECTOR IN FOCUS - Increase the current limits under the CGTMSE scheme to Rs. 4 crores. - Effective monitoring framework of CGTMSE Scheme schemes by NBFCs (4). Performance Incentives 1. Develop framework for the utilization of Rs 10,000 crore worth MSME Development Fund and Rs 200 Crore fund for MSME Technology upgradation an-nounced in the recent Union budget. 2. Create business facilitation centres with linkage of all stakeholders i.e. Industry Associations, equity funds, banks and financial institutions, MSME, etc at regional and district level to facilitate access to finance for MSMEs. 3. Direct tax exemption on export income and income generated directly or indirectly from indigenization and import substitution exemption for a period of 5 years. Direct tax exemptions for 5 to 10 years for foreign company wanting to set shop in India with a JV/collaboration with MSMEs. 4. Financial aid in the form of grants must be given to ‘Prototype / Proof of Concept’ which are validated and purchased by sector large players for scaling up and commercialization. One year exclusivity win-dow to be given for on patent and innovation. (5). Skill India 1. Approved courses at approved training centres to receive direct incentives and grants. 2. 10 per cent of additional employment generated to be incentivized by way of employment allowance type deduction. Tax exemption or weighted tax de-ductions for employing women and special catego-ries. 5 to 10 year tax exemption on income gener-ated in business by setting up facilities in Rural and Rurban areas. 3. Profit sharing with traditional industries and artisan through MSME JVs to be incentivized through spe-cific schemes. 4. National Industry Bodies to play a role of Mentors in promoting Innovation and Entrepreneurship through innovative programs like Business Men-toring Services and Senior Expert advisory Services which will help in providing the necessary guid-ance’s for the entrepreneurs and MSMEs in getting the necessary inputs from the Mentors who have knowledge in managing similar situations. 5. Support and provide incentives for upgradation of skill development Institutions. Conclusion In India, MSME are very large in numbers, diverse in type of business and spread across remote geographies of the vast country. Many are informal and not registered with the formal MSME ecosystem. It will require significant changes in philosophy and approach to be able to develop and deliver a new wave ecosystem which facilitates their development and seizes the emerging domestic and global opportunities. At a minimum, any hurdles in doing business are to be removed. This will help unleash a young and dynamic entrepreneurial talent in India who will be willing to make self-entrepreneurship the first career choice and develop growth companies. Seizing the emerging opportunities to develop a robust MSME sector as a strong backbone for a growing economy will require efforts by the Government to bring the various stakeholders – Equity funds, banks and financial institu-tions, industry sector majors and MNCs, regulators across various Ministries in Centre and State and trade associa-tions and global economies having trade flows with India and others stakeholders together; and create a forward looking framework and ecosystem. Further, speedy utilization of the Rs 10,000 crore fund for MSME and the Rs 200 crore fund for technology upgradation announced in the recent Union budget can provide excellent immedi-ate impetus to the development of MSMEs.
  30. 30. 31 FOCUS OF THE MONTH Coal : Challenges and Way Forward SEPTEMBER - OCTOBER 2014 Mining in India is a major economic activity which contributes significantly to the econo-my of India. The GDP contribution of the min-ing industry varies from 2.2 per cent to 2.5 per cent. Coal with a proven reserve of 860 billion tonnes is mined the most in the world. At the same time, the demand curve for this sector is always on the rising side. The major rea-sons are the soaring power demand in India and China, the growing worldwide steel production, and lastly, the increasingly stringent environment regulations. As a prospering economy, India faces energy security as a growing challenge and the coal production is expected to grow at a fast pace. However, the recent Supreme Court verdict cancel-ling all but four coal blocks allocated since 1993 has increased by manifolds the challenges faced by this important sector. The ruling is likely to cause many far reaching “consequences” for the Indian coal sector. To negate the ill-effects of the cancellations of coal blocks, the cabinet recently cleared an ordinance to facilitate the allotment of coal mines to state-owned companies that need the fuel, and also to private entities in busi-nesses such as power, iron and steel, and cement for so-called captive consumption. The latter will have to bid for such mines through an e-auction. Through the ordi-nance, the government also retained the right of allow-ing mines to be allotted to private companies for min-ing coal and selling to others. Apart from resolving the crisis created by the cancellations, the ordinance also paves the way for addressing the issue of coal short-age that has affected several power and other plants. It will also significantly reduce India’s coal import bill of around US$20 billion a year. Hence, the spotlight currently is clearly on coal sector. In this month’s focus of the month, we invite experts to voice their opinions on the many challenges faced by the sector and the way forward.
  31. 31. Current Coal Situation and its Impact on Power Sector ECONOMY MATTERS 32 FOCUS OF THE MONTH The power sector, for long, has been seeking the much-needed reforms on fuel supply scenario in the country. An analysis of the energy and demand trends in India indicates that the energy mix will remain heavily dependent on coal and imports of crude oil. As on December 31, 1947, India’s per capita electricity consumption was recorded to be 16.3 kWh1 , this figure as of March, 2013 was calculated to be 917.2 kWh2 indicating the mammoth increase in demand for electricity in India in the past six plus decades. The de-mand for electricity continues to grow as the country aims to regain the 9 per cent growth rate – which can only be sustained by a 12-13 per cent rate of growth of the power sector. Easing the regulatory framework and creating a smooth liquidity flow in the sector has significantly improved the condition of the power value chain. A developing country like India with industrial growth at the crux of our development - have a long way to go before we consider ourselves to be energy sufficient. The biggest roadblock is the acute shortage of fuels for power gen-eration. This continues to be the primary challenge de-spite the highest priority being given to development of generation based on renewable energy sources under the Low carbon growth strategy, the fuel mix of India’s generation capacity is expected to remain roughly the same in the coming years. Domestic Coal - Issues & Concerns Indian coal gives a comparatively poor natural fuel val-ue. On an average, the Indian power plants consume about 0.7 kg of coal to generate a kWh, as compared to the United States, where the thermal power plants con-sume about 0.45 kg of coal per kWh. This is attributed to the variance in the quality of the coal, as measured by the Gross Calorific Value (GCV). Indian coal approxi-mately has a GCV of about 4500 Kcal/kg, which is lower in comparison to other countries. The stagnation of domestic coal production is also lead-ing to India becoming increasingly dependent on coal imports, which have recently experienced unprecedent-ed rise in prices. To give a broad overview, in order to bridge the gap between power demand and coal avail-ability, power utilities’ imports of all types of coal during the period (first half of 2014-15) stood at 110.15 million tonnes (MT) as against 92.98 MT imported during the corresponding period of 2013-14. This is an increase of about 18.47 per cent in the first half of FY153. Imported Coal – Issues & Concerns Over the past four decades the international coal mar-ket has been range bound and stable in terms of price and availability. Internationally, coal commitments are typically for short-term, less than 5 years for supply and 1 http://www.cea.nic.in/reports/planning/dmlf/growth.pdf 2 http://www.cea.nic.in/reports/monthly/executive_rep/aug14.pdf 3 http://articles.economictimes.indiatimes.com/2014-10-08/news/54784764_1_coal-imports-coal-minister-piyush- goyal-less-than-four-days
  32. 32. 33 FOCUS OF THE MONTH SEPTEMBER - OCTOBER 2014 less than 6 months for price. Suitable source for Indian needs include countries like Indonesia, Australia, and South Africa. However, in September 2010, the Indone-sian government introduced a new regulation stipulat-ing benchmarking coal prices. Consequently the prices of coal from Indonesia have gone up an average of 130 – 150 per cent between 2007 and present 4. This change in the market environment has created a volatile situa-tion. Similarly, other countries exporting coal to India have also amended domestic laws, impacting the price of coal for Indian developers. This unprecedented and unanticipated increase in im-ported coal prices has made most imported coal based power projects unviable at their contracted tariffs. The projects awarded through competitive bidding have been severely affected. The problem that the Indian imported coal based pro-jects are facing, is primarily on account of the sudden shift in price levels of imported coal coupled with the impact of unexpected ‘Change in Law’ in those foreign countries from where coal is being imported. Since the change in law, causing increase in the coal prices have been effected in some of these foreign countries, the provision for ‘Change-in-Law’ in the PPA does not pro-tect the Indian power developers from this eventuality. This has exposed the vulnerability of the power projects dependent on imported coal due to legal/regulatory changes in coal exporting, which are beyond the con-trol of coal producers. It is estimated that over 50,000 MW capacity power plants have been impacted- in one way or the other-by these volatilities in the coal market. Recommended Way Forward Fuel price pooling provides a possible solution, which will enable the import of the fuels for the interim period to boost this impacted capacity and allow the cost of import to be shared equally by all the generation capaci-ty, by pooling it with our domestic fuels. It is critical that we take pooling as a short-term solution only. There is need for reforms in the coal mining sector to attract private investment that can support increased domestic coal production. The need of the hour is to evolve a long-term nation-al energy security policy. At this time all the different states/UTs of India plan for their power requirement in-dependently as it is a state subject. There is a need for a central body to assess the need of each of these states and then plan for them, their fuel sourcing-from a bas-ket of different fuels alongside their power production. Under the policy, the central government must con-sider mediating to resolve issues related to the pending fuel supply agreements for long-term fuel linkages both in India and overseas. The policy must take into account that resources are a subject that many countries like to deal on a government-to-government (G-to-G) basis. An example is the growing engagement between Chi-na and Latin America. These engagements were in the form of loan provided by the China Development Bank to Venezuela, Brazil, Argentina and Equador in return for oil supply5. Like the other progressive nations, the Indian government must, also, become more proactive in engaging with the countries on a G-to-G basic to se-cure access to scarce resources. There is also a need to establish an appropriate mecha-nism to offset in tariff the adverse impact of the unfore-seen, uncontrollable and unprecedented escalation in the imported fuel price due to market fluctuations. In addition, it is imperative to make the domestic coal in-dustry more competitive and introduce policy and regu-latory reforms to enable increase in coal production in the country. 4 http://www.financialexpress.com/story-print/1153460 5 Chinese Engagement in Latin America and the Caribbean: Implications for US Foreign Policy: American University, School of Internationa Service
  33. 33. ECONOMY MATTERS 34 FOCUS OF THE MONTH I have had a flurry of calls (anguished monologues in most cases) and noticed copious Facebook posts from fund manager friends from abroad expressing their concern over the Supreme Court’s cancellation of coal-block allocations. I suspect that much of what they are saying is merely repetition of what editorials and op-ed columns have already said. However, I thought it might be a good idea to give readers a flavour of how the world outside (albeit based on a remarkably small sam-ple) views this. One of the problems is that the verdict comes at the beginning of what is likely to be a prolonged phase of uncertainty for financial markets, the upgrade in India’s ratings outlook by Standard & Poor’s notwithstanding. Thus, the sell-off in the stock markets on Thursday, after Wednesday’s verdict, merely built on the negative sen-timent that things like the uncertainty over when the United States Federal Reserve will hike rates has trig-gered. There is also a growing sense that, despite the government’s best efforts, the economy will take time to heal. This is driving a rotation of funds away from cy-clical stocks to defensives, such as consumer staples, and these rotations are typically a period of consolida-tion for the headline market indices. Thus, the untram-meled upward momentum in the markets could have been broken. The markets await the decision on natural gas prices, and any hiccup there could provide negative reinforcement. It might be useful to put together a list of complaints or concerns that centre around the verdict. To start with, the court’s decision has brought back distinctly unpleas-ant memories of both the retrospective taxation (and the announcement of the General Anti-Avoidance Rules in the February 2012 Budget) and the cancellation of 2G licences. The problem, as with the 2G verdict, is the busi-ness of “retrospective action” - trying to change the past instead of trying to do better in the future. Some have noted the curious irony of the highest court in the land seeming to violate the very sanctity of the contract between the executive and the firm, a contract that they believe should have been carved in stone. Minority shareholders of the miners feel particularly peeved, as they were not part of the negotiation be-tween the management of the de-allocated miners and the government. No amount of due diligence, they claim, would have alerted them to these regulatory risks. There are two implications of this. There could be a general aversion to sectors where there is even the mildest whiff of regulatory or policy uncertainty. Sec-ond, the repercussions are unlikely to be confined to portfolio investments alone. An increase in political risk premium will get built into direct investments as well. For a country that finds itself close to the bottom of the pile when it comes to the ease of doing business, this is unlikely to augur well. While “retrospective action” is a general point of con-cern, there are more nuanced issues as well. Fund man-agers are hardly legal experts, but one point they all seem to be united on is the fact that the judiciary should pass judgment on the impropriety or malfeasance of in-dividuals, groups of individuals, or companies, and not on a process or a policy. One implication of indicting the policy as a whole is that it tars all players (in this case the mine licensees) with the same brush. Thus, a somewhat Too Big to De-Allocate?
  34. 34. 35 FOCUS OF THE MONTH SEPTEMBER - OCTOBER 2014 extreme way to view this judgment is that it depicts all companies that wanted to mine coal as part of a cabal that worked with corrupt bureaucrats to perpetrate one of the biggest land grabs in India’s history. This is patently unfair to bona fide miners who thought they were entering a legitimate business. Not only do they lose their licences, they need to pay the government for their efforts. While accepting that the system was rotten and had pushed the limits of forbearance, some contributors to the “debate” claim that judgments that have major implications for the economy should invoke a princi-ple similar to the “too big to fail” argument applied to troubled financial institutions. Clearly, there are ethical issues in bailing out large banks when they face the pos-sibility of comeuppance for irresponsible risk-taking ac-companied by the moral hazard of encouraging similar behaviour in the future by appearing to condone their action. Yet they are bailed out keeping in mind the sys-tem- wide repercussions. In the coal-mine case, a com-promise that draws on this principle would have been to exempt the 46 operational coal blocks and the six that are likely to come on stream. There should be very little doubt that the judgment will indeed cause signifi-cant disruption in the economy. I find stakeholders in the coal economy, such as the banks (who could see a bulge in non-performing loans), putting on too brave a face on the consequences of this at least in the public domain. Instead, we could have done with a clearer pic-ture of what the damage will be. This action comes at a time when little regulatory nig-gles abound. The Uber case (that involves a taxi compa-ny and the Reserve Bank of India), however insignificant in the larger scheme of things, seems to have attracted a fair bit of attention as an example of regulation that is both anti-competitive and chooses to go strictly by the book rather than consider consumer interest. There is a face-off between the department of telecom and telcos on intra-circle roaming, a facility that was built explicitly into the licensing agreement. The debate on whether a “strictly by the book” approach to laws and regulations or whether more “sensitive” and flexible interpreta-tion is needed for our state and economy needs to be resolved urgently. This article appeared in Business Standard dated 28th September 2014. We thank Business Standard for allowing us to reprint the article. The online version can be accessed from the following link: http://www.business-standard.com/article/opinion/abheek-barua-too-big-to-de-allo-cate- 114092900006_1.html
  35. 35. Coal Mining Ordinance: Turning Crisis into an Opportunity ECONOMY MATTERS 36 FOCUS OF THE MONTH Within two days of the Union Cabinet decid-ing to bring in an ordinance to handle the situation arising out of the Supreme Court order annulling captive mine allocations, the Coal Mines (Special Provisions) Ordinance was promulgated. While the ordinance was needed for transferring assets and liabilities of the prior allottees, what it will also do is in-troduce competition into the coal mining sector by do-ing away with the requirement of end-use projects. Now, coal can be mined for commercial use and sold for profit. Once 130 of the mines listed in the first schedule are allotted to companies not into power, cement, steel or any other notified uses, coal will be freely available in the market. India doesn’t have companies that simply mine and sell. But with this move, there is a likelihood of such companies coming up. As there is no restriction on foreign investment into the coal sector, companies such as BHP Billiton and Rio Tin-to can easily bid through their Indian subsidiaries. In the first schedule of the ordinance, there are 204 mines, whose allocations were cancelled by the Su-preme Court; the coal-bearing land acquired by previous allottees of these mines; and the mining infrastructure. The second schedule comprises those 42 mines men-tioned in the first that are operational and for which the apex court has allowed a six-month grace period. The third schedule has the 32 mines that are in various stages of development. The government is empowered to include more mines to this list. The Supreme Court’s September 24 order had de-allocated captive mines given to private companies through two decades. “The (government) approach has been ad-hoc and casual,” said the order. The reason for such a scathing observation was there weren’t any set criteria for allocation of mines. Since mining deals with natural resources held by the government in pub-lic trust, discretion in allocation to private companies is viewed with suspicion. State government companies that were given mining rights under the government’s dispensation route also faced de-allocation, as they gave mines to private companies for commercial min-ing, not allowed under the law earlier.
  36. 36. BACK TO COMMERCIAL MINING AFTER 42 YEARS The Coal Mines (Special) Provisions Ordinance, promulgated on October 21, classifies mines into three schedules. It also changed the Coal Mines Nationalisation and Mines and Minerals (Development and Regulation) Acts to permit commercial mining Nationalisation: How it happened • Coking coal mines were nationalised in 1972, followed by nationalisation of non-coking coal mine in 1973. The Coal Mines Nationalisation (CMN) Act, enacted in 1976, terminated leases of private holders except those of iron and steel producers for their captive use 37 FOCUS OF THE MONTH SEPTEMBER - OCTOBER 2014 Captive mining • In July 1992, a screening committee under the chairmanship of the coal secretary was set up to consider appli-cations for captive mining. A total of 143 coal blocks of Coal India and Singareni Collieries, for which production plans weren’t in place, were offered. The Act was amended in June 1993 to include power as end use. In March 1996, cement and in July 2007, coal gasification and liquefaction too were notified as specified end uses • Captive mining was opened up to 100 per cent FDI under the automatic route in Feb 2006. Past attempts to permit commercial mining • The Cabinet approved changes to the CMN Act in Feb 1997 but the Bill remained pending, after being intro-duced in the Rajya Sabha in April 2000 Competitive bidding • The Mines and Minerals (Development and Regulation) Act was amended in Sept 2010 to make competitive bidding applicable to all minerals. In Feb 2012, the UPA govt notified auctioning of coal mines De-allocation of captive mines • On Aug 25, 2014, the Supreme Court held all coal block allocations as illegal. Leases of 204 mines cancelled on Sept 24 By ordering the takeover of mines and the land at-tached to those, the Supreme Court order has, in many ways, given a taste of nationalisation to the sector, the second time, after the Indira Gandhi government had nationalised it in the 70s. But by allowing commercial mining and saying auctioning of coal mines will happen according to the three schedules, the government has tried to calm investor’ nerves. Though there are doubts on what kind of response auctioning of coal mines, introduced by the United Progressive Alliance govern-ment last year, will get, the National Democratic Alliance government has successfully managed to turn a crisis into an opportunity by permitting commercial mining. This article appeared in Business Standard dated 26th October 2014. We thank Business Standard for allowing us to reprint the article. The online version can be accessed from the following link: http://www.business-standard.com/article/opinion/coal-mining-ordinance-turning-crisis-into-an-opportunity- 114102600650_1.html

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