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ECONOMY MATTERS 2
1
FOREWORD
NOVEMBER 2016
E
ase of Doing Business has been a priority with the government, as it has made a concerted and
c...
3 NOVEMBER 2016
5
EXECUTIVE SUMMARY
NOVEMBER 2016
FocusoftheMonth: EaseofDoing
Business: Moving Ahead Steadily
The recent release of the W...
ECONOMY MATTERS 6
FOCUS OF THE MONTH
Ease of Doing Business: Moving Ahead Steadily
tably, India registered an improvement ...
7
FOCUS OF THE MONTH
NOVEMBER 2016
Nonetheless, several key reforms have been recog-
nized by the Report where it has note...
ECONOMY MATTERS 8
FOCUS OF THE MONTH
India’s Ranking improves in WEF’s Global
Competitiveness Index
I
n some good news, In...
9
FOCUS OF THE MONTH
NOVEMBER 2016
•	 Table 1 illustrates which pillars (out of the 12 pillars
of WCI) improved or deterio...
ECONOMY MATTERS 10
FOCUS OF THE MONTH
ency in the financial system (up 15 places in 2016
from 2015).
•	 Tax regulation was...
11
FOCUS OF THE MONTH
NOVEMBER 2016
India Moves up in World Bank’s ‘Ease of Doing
Business’ Ranking
I
ndia improved its ra...
ECONOMY MATTERS 12
FOCUS OF THE MONTH
The ranking of India is likely to improve going forward in
response to the slew of r...
13
FOCUS OF THE MONTH
NOVEMBER 2016
Assessment of State Implementation of Business Re-
forms 2016: Report by DIPP & World ...
ECONOMY MATTERS 14
FOCUS OF THE MONTH
The highlight of the implemented reforms during this
period is as follows:
• 	 Singl...
15
FOCUS OF THE MONTH
NOVEMBER 2016
taka, Madhya Pradesh, Maharashtra, Odisha,
Punjab, Rajasthan, Tamil Nadu, Telangana, U...
ECONOMY MATTERS 16
FOCUS OF THE MONTH
Enforcing Contracts: Need to Improve the Ju-
dicial Ecosystem
I
t is well recognized...
17
FOCUS OF THE MONTH
NOVEMBER 2016
Problems due to ineffective contract en-
forcement
a. Lack of trust and predictability...
ECONOMY MATTERS 18
FOCUS OF THE MONTH
Reforms in Customs Procedures to Improve
Ease of Doing Business
I
nternational trade...
19
FOCUS OF THE MONTH
NOVEMBER 2016
fice, did the self assessment himself and made the duty
payment electronically based o...
ECONOMY MATTERS 20
FOCUS OF THE MONTH
(Views expressed are personal)
Finally, Indian Customs has been taking the lead in t...
21
FOCUS OF THE MONTH
NOVEMBER 2016
Book Review: India the Business Opportunity by
Dr. Linda Spedding, Eastern Book Compan...
ECONOMY MATTERS 22
FOCUS OF THE MONTH
dure of acquisition of shares of a private company or
public company and the limitat...
23
FOCUS OF THE MONTH
NOVEMBER 2016
border trade with India (c) tax implications during
corporate transactions of acquisit...
25
DOMESTIC TRENDS
GDP Growth Stabilises in 2QFY17
NOVEMBER 2016
G
DP growth in the first quarter of the current fis-
cal ...
ECONOMY MATTERS 26
DOMESTIC TRENDS
Consumption continues to outpace invest-
ment
At market prices, private consumption exp...
27
DOMESTIC TRENDS
NOVEMBER 2016
Manufacturing sector posts positive growth
after two consecutive months of decline
The ma...
ECONOMY MATTERS 28
DOMESTIC TRENDS
Core sector output improves for the second
consecutive month in October 2016
The output...
29
DOMESTIC TRENDS
NOVEMBER 2016
Outlook
The pick-up in industrial output in September 2016 after two consecutive months o...
ECONOMY MATTERS 30
DOMESTIC TRENDS
Outlook
Both WPI and CPI inflation moderated in October 2016, providing relief to the p...
31
DOMESTIC TRENDS
NOVEMBER 2016
Merchandise trade deficit widens sharply in
October 2016
Owing to positive growth posted ...
ECONOMY MATTERS 32
POLICY FOCUS
1.	 Demonetization gives body blow to black
economy
In a historical move that will add rec...
33
POLICY FOCUS
NOVEMBER 2016
Highlighting the key features of the measures an-
nounced, PM Modi added that these decision...
ECONOMY MATTERS 34
POLICY FOCUS
taken to ensure availability of cash in rural branches of
Banks and 1.55 lakh Post Offices...
35
POLICY FOCUS
NOVEMBER 2016
Rupee bonds overseas offer ease of access compared to
the process of direct investments in I...
ECONOMY MATTERS 36
POLICY FOCUS
line with the tax rate under Indian tax laws. It also up-
dates the text of other provisio...
Focus of the Month: Ease of Doing Business: Moving Ahead Steadily
Focus of the Month: Ease of Doing Business: Moving Ahead Steadily
Focus of the Month: Ease of Doing Business: Moving Ahead Steadily
Focus of the Month: Ease of Doing Business: Moving Ahead Steadily
Focus of the Month: Ease of Doing Business: Moving Ahead Steadily
Focus of the Month: Ease of Doing Business: Moving Ahead Steadily
Focus of the Month: Ease of Doing Business: Moving Ahead Steadily
Focus of the Month: Ease of Doing Business: Moving Ahead Steadily
Focus of the Month: Ease of Doing Business: Moving Ahead Steadily
Focus of the Month: Ease of Doing Business: Moving Ahead Steadily
Focus of the Month: Ease of Doing Business: Moving Ahead Steadily
Focus of the Month: Ease of Doing Business: Moving Ahead Steadily
Focus of the Month: Ease of Doing Business: Moving Ahead Steadily
Focus of the Month: Ease of Doing Business: Moving Ahead Steadily
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Focus of the Month: Ease of Doing Business: Moving Ahead Steadily

Focus of the Month: Ease of Doing
Business: Moving Ahead Steadily

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Focus of the Month: Ease of Doing Business: Moving Ahead Steadily

  1. 1. ECONOMY MATTERS 2
  2. 2. 1 FOREWORD NOVEMBER 2016 E ase of Doing Business has been a priority with the government, as it has made a concerted and coordinated effort across all ministries and state governments to improve the business environ- ment. Industry too feels that the business ecosystem has improved over the last two years owing to the impressive list of reforms implemented. The recent World Bank Doing Business Report for 2017 indicating a marginal improvement in India’s ranking among 189 countries from 131 to 130 was therefore a disappointment. CII is and will continue to work in tandem with World Bank, DIPP, industry and other stakeholders on improving the business environment further. Going forward, with the participation of all players, we are confident that the Doing Business report will recognize the many achievements taking place in the Indian economy. Ease of Doing Business is an ongoing effort, and there will always be work to be done. Suffice it to say that the journey has begun on a good note and the government has shown resolve, dedication and commitment to the effort of taking India’s ranking to a higher level. On the domestic front, the pick-up in industrial output in September 2016 after two consecutive months of contraction is an encouraging sign. Going forward, normal monsoons, along with the im- pact of interest rate reductions and 7th pay commission handouts are expected to boost demand. There may be short-term disruptions on account of government’s recent demonetisation move as it impacts the cash based transactions, which are a large part of the Indian economy. However, in the medium-term this will lead to greater formalization of the economy, better compliance among businesses, wider spread of digital payments leading to greater productivity and growth and more confidence among investors. With a single move, the government has reiterated its strong com- mitment to addressing the scourge of black money prevalent in the country. It has articulated its strict stance on not tolerating any kind of unaccounted cash, undisclosed incomes, and tax evasion. The Federal Reserve is bracing itself for an interest rate increase in December 2016 as the US econ- omy has been recovering slowly but steadily. The job market has stepped up and inflation, while still below the Fed’s 2 per cent target is picking up. Moreover the likelihood of an interest rate in- crease has multiplied manifolds with the election of Donald Trump as the new 45th President of US. Trump is widely regarded as a supporter for Reaganomics which promulgates tight monetary poli- cy coupled with an accommodative fiscal policy stance. On the other side of the globe, Japan saw its economic growth witness a higher-than-expected upsurge in the third quarter of 2016, helped by stronger exports. However, domestic consumer spending and business investment remained soft indicating that the central bank’s ultra-loose monetary policy has not yet had an impact. Chandrajit Banerjee Director General, CII
  3. 3. 3 NOVEMBER 2016
  4. 4. 5 EXECUTIVE SUMMARY NOVEMBER 2016 FocusoftheMonth: EaseofDoing Business: Moving Ahead Steadily The recent release of the World Bank’s Ease of Doing Business Report saw India’s ranking improve by one po- sition to 130 from last year. The marginal improvement in ranking led to disappointment among the policy cir- cles as government was hopeful of a major leap in the rankings owing to the impressive list of reforms imple- mented in the past one year. Moreover, such a concert- ed and coordinated effort across all ministries and state governments has not been made ever before in India’s industrial history. The Government is to be commended for addressing the hurdles and fast-tracking administra- tive processes in such a comprehensive manner. In this context, it is encouraging to note that India’s absolute score improved from 53.93 to 55.27, which is the first time in history when its absolute score has improved in two consecutive years. Going forward, with the par- ticipation of all players, we are confident that the Doing Business report will recognize the many achievements taking place in the Indian economy. Ease of Doing Busi- ness is an ongoing effort, and there will always be work to be done. Domestic Trends Industrial output moved to the positive territory in Sep- tember 2016 after two consecutive months of contrac- tion. Industrial production posted a growth of 0.7 per cent as compared to decline of an equivalent amount in the last month. Manufacturing and consumer goods sectors witnessed improvement during the month, thus contributing to the uptick in the headline data print. However, capital goods continued to weigh on the over- all industrial growth. On a cumulative basis, factory out- put in April-September 2016 contracted by 0.1 per cent compared to 4.0 per cent growth in the same period a year-ago. Overall in FY17, we expect industrial produc- tion to grow at a higher rate as compared to the previ- ous fiscal on the back of policy aided domestic upturn and low global commodity prices. Meanwhile, both WPI and CPI inflation moderated in October 2016, providing relief to the policymakers. It also validated the Reserve Bank of India’s decision to frontload an interest rate cut in anticipation of such a development. Policy Focus In a historical move that will add record strength in the fight against corruption, black money, money launder- ing, terrorism and financing of terrorists as well as coun- terfeit notes, the Government of India has decided that the Rs 500 and Rs 1000 notes will no longer be legal tender from midnight, 8th November 2016. Currency in the form of Rs 1000 and Rs 500 notes amounted to Rs 14.2 lakh crore as of March 2016, or about 85 per cent of total currency in circulation. The impact of the deci- sion to make Rs 500 and Rs 1000 no longer legal tender will be felt in addressing the issues of terrorism, coun- terfeit currency, and arms smuggling, as mentioned by Hon’ble Prime Minister. It would have economy-wide positive advantages in tackling the scourge of corrup- tion that has taken hold in the country over the last sev- eral decades. Global Trends In line with market expectations, US Federal Reserve maintained a status-quo and kept the Fed funds target range unchanged at 0.25-0.50 per cent in its monetary policy review held on November 3rd, 2016. The Federal Open Market Committee (FOMC) judged that the case for an increase in the federal funds rate had continued to strengthen but decided, for the time being, to wait for further evidence of continued progress toward its objectives. However, the stance of the Federal Reserve remains accommodative, thereby supporting further improvement in labor market conditions and a return to 2 per cent inflation. Elsewhere, Japan’s economic growth beat expectations in the July-September period to expand for a third straight quarter; helped by strong- er exports. But weak domestic activity cast doubt on hopes for a sustainable economic recovery. To be sure, the world’s third-largest economy expanded 0.9 per cent between July and September 2016 on year-on-year basis as compared to 0.6 per cent posted in the previ- ous quarter.
  5. 5. ECONOMY MATTERS 6 FOCUS OF THE MONTH Ease of Doing Business: Moving Ahead Steadily tably, India registered an improvement in ranking on 2 key indicators out of the 10 Doing Business indicators, which are ‘getting electricity’ (ranking improved by 44 places) and ‘enforcing contracts’ (ranking improved by 6 places). In ‘paying taxes’, we came in at the same rank as last year, while in the remaining five fields, the rank- ings have tumbled. CII has been working very closely over the last several years on the ease of doing business process. The imple- mentation of reforms have never been faster, with the government implementing widespread reforms across a number of areas including company incorporation, tax procedures and dispute resolution, land allocation, environmental and forest clearances, and getting pub- lic utility connections, apart from many others. Further, there are several areas like the opening of FDI across sectors, labour reforms, etc. which have contributed to the improvement in the overall investment climate apart from procedural issues. State governments too have identified land banks for the setting up of industrial parks and are taking rapid strides on handholding inves- tors and expediting processes through single window systems and online interface. Additionally, many states are also holding mega investor meetings for showcas- ing their achievements in order to attract investment. T he recent release of the World Bank’s Ease of Do- ing Business Report saw India’s ranking improve by one position to 130 from last year. The mar- ginal improvement in ranking led to disappointment among the policy circles as government was hopeful of a major leap in the rankings owing to the impressive list of reforms implemented in the past one year. Moreo- ver, such a concerted and coordinated effort across all ministries and state governments has not been made ever before in India’s industrial history. The Govern- ment is to be commended for addressing the hurdles and fast-tracking administrative processes in such a comprehensive manner. In this context, it is encourag- ing to note that India’s absolute score improved from 53.93 to 55.27, which is the first time in history when its absolute score has improved in two consecutive years. The World Bank Report lays emphasis on the adminis- trative procedures and time taken for ten defined pa- rameters of the business cycle from starting a business to obtaining credit and exiting through insolvency. No-
  6. 6. 7 FOCUS OF THE MONTH NOVEMBER 2016 Nonetheless, several key reforms have been recog- nized by the Report where it has noted improvements. Examples include online filing and payment of returns under ESIC, ICEGATE for import clearances, etc. How- ever several reforms which have taken place since the last World Bank report have not been incorporated as they came after the deadline of June 1, for instance, legislation of the transformational Goods and Services Tax (GST), the institution of the Insolvency and Bank- ruptcy Code, rapid introduction of INC-29 for company incorporation by the Ministry of Corporate Affairs etc. Moreover, the report currently looks at reforms in just two cities of Delhi and Mumbai. These two cities have been making progress, but it is not sufficient to capture the entire status of the country. It is pertinent to mention here that aside from the World Bank’s report, India has moved up the rankings of the recently released Global Competitiveness Report of the World Economic Forum by 16 positions this year and leaped 19 slots in the World Bank’s Logistics Perfor- mance Index. CII has been working with DIPP and the World Bank on ranking of 29 states and 7 UTs on a real time basis for 340 parameters. These rankings are quite an unprecedented and innovative reform measure by itself and have been taken up for the first time. This year, with the expansion of parameters, we have seen tremendous improvement. As many as ten states have implemented over 90 per cent of the reform measures and 17 states have achieved success in over 75 per cent of the parameters. This is indeed a remarkable achieve- ment in less than one year. The spirit of competitive fed- eralism to attract FDI has also been seen in roadshows, investor meets and investor facilitation undertaken by state governments, both in India and overseas. Some of the key reforms undertaken by the state governments include electronic registrations, online payment of tax- es, easier electricity connections, and simpler regimes for inspections by labour and pollution inspectors. At the ground level, domestic and overseas industry has undoubtedly experienced improvement in the invest- ment climate. CII is and will continue to work in tandem with World Bank, DIPP, industry and other stakehold- ers on improving the business environment further. Going forward, with the participation of all players, we are confident that the Doing Business report will recog- nize the many achievements taking place in the Indian economy. Ease of Doing Business is an ongoing effort, and there will always be work to be done. Suffice it to say that the journey has begun on a good note and the government has shown resolve, dedication and com- mitment to the effort of taking India’s ranking to within 50. This may take some more time than anticipated, but we are sure to get there. In this month’s Focus of the Month, we provide an analysis of the three Ease of Do- ing Business Surveys released by various multilateral agencies, in addition to experts providing their insights into the various sub-components of the these surveys.
  7. 7. ECONOMY MATTERS 8 FOCUS OF THE MONTH India’s Ranking improves in WEF’s Global Competitiveness Index I n some good news, India’s ranking in the Global Com- petitiveness Index for 2016-17, released by the World Economic Forum (WEF) improved 16 places to 39, making it the fastest ascent up the ranks among 138 countries surveyed. In fact, this is the second year in a row when India’s ranking has jumped 16 spots. In the year 2015-16, India was ranked at the 55th place. “Thanks to improved monetary and fiscal policies as well as lower oil prices, the Indian economy has stabilised and now boasts of the highest growth among G20 coun- tries,” the WEF’s Global Competitiveness Report 2016- 17 stated. India is also the second most competitive country among BRICS nations. “China, on 28, remains top among the BRICS grouping although another surge by India – which climbs 16 places to 39 – means there is now less of a gap between it and its peers. With both Russia and South Africa moving up two places to 43 and 47, respectively, only Brazil is declining, falling six places to 81,” WEF said in its report. In the WEF report, Swit- zerland, Singapore and the United States remained the world’s most competitive economies. Brief Methodology WEF defines competitiveness as the set of institutions, Key highlights of India’s performance • India’s GDP per capita in PPP terms almost dou- bled between 2007 and 2016, from US$3,587 to US$6,599. However, economic growth in India slowed after the 2008 global financial crisis, hitting a decade’s low in 2012–13. This experience prompt- policies, and factors that determine the level of produc- tivity of an economy, which in turn sets the level of pros- perity that the country can achieve. Since 2005, building on Klaus Schwab’s original idea of 1979, the World Eco- nomic Forum has published the Global Competitiveness Index (GCI) developed by Xavier Sala-i-Martín in collabo- ration with the Forum. The GCI combines 114 indicators that capture concepts that matter for productivity and long-term prosperity. These indicators are grouped into 12 pillars (see Figure 1): institutions, infrastructure, macroeconomic environ- ment, health and primary education, higher education and training, goods market efficiency, labor market ef- ficiency, financial market development, technological readiness, market size, business sophistication, and in- novation. These pillars are in turn organized into three sub-indices: basic requirements, efficiency enhancers, and innovation and sophistication factors. The three sub-indices are given different weights in the calcula- tion of the overall Index, depending on each economy’s stage of development, as proxied by its GDP per capita and the share of exports represented by raw materials. ed India to rethink its policies and implement the reforms necessary to improve its competitiveness. Growth rebounded in 2014 and last year surpassed that of China, making it the fastest-growing large emerging market in that year. • India’s competitiveness score stagnated between 2007 and 2014, and the economy slipped down the GCI rankings.
  8. 8. 9 FOCUS OF THE MONTH NOVEMBER 2016 • Table 1 illustrates which pillars (out of the 12 pillars of WCI) improved or deteriorated over the 10 years from 2007 to 2016. Due to the rebound in economic growth between 2015 and 2016, India’s overall com- petitiveness score in this period increased by 0.19 points. • The two most significant improvements were seen in infrastructure and in health and primary educa- tion: for example, India almost halved its rate of infant mortality (62 per 1,000 in the 2007–2008 edi- tion of the GCI versus 37.9 today). Life expectancy increased to 68, up from 62, 10 years ago, while pri- mary education has become almost universal (up to 93.1 per cent from 88.8 per cent). • Moreover, India has made significant progress on infrastructure, one of the pillars where it ranked worst, the WEF report states. As India closed the infrastructure gap, new priorities have emerged. The country’s biggest relative weakness today is in technological readiness, where initiatives such as Digital India could lead to major improvements in the coming years. Most importantly, India has out- performed countries in the same stage of develop- • As compared to the WCI rankings of 2015, in 2016, India’s competitiveness improved across the board, particularly in goods market efficiency (ranked 60 in 2016), business sophistication (ranked 35 in 2016) and innovation (ranked 29 in 2016). WEF said that ment, mostly those in sub-Saharan Africa, in all pil- lars except labor market efficiency. Macroeconomic environment is another basic requirement where India’s performance has improved significantly. • However, as per the WEF report, financial market development is the pillar which is currently drag- ging down India’s competitiveness the most as compared to 10 years ago. Here the efforts of the Reserve Bank of India to increase transparency in the financial market and shed light on the large amounts of non-performing loans, previously not reported on the balance sheets of Indian bank, are laudable. • The efficiency of the goods market has also deterio- rated, resulting from India’s failure to address long- running problems like implementing GST. But this is about to change next year. Another area of con- cern is India’s stagnating performance on techno- logical readiness. These pillars will be key for India to prosper in its next stage of development, when it will no longer be possible to base its competitive- ness on low-cost, abundant labor. Higher education and training has also shown no improvement. the recent reform efforts by the government have concentrated on improving public institutions (up 16 places in 2016 from 2015), opening the economy to foreign investors and international trade (up 4 places in 2016 from 2015), and increasing transpar-
  9. 9. ECONOMY MATTERS 10 FOCUS OF THE MONTH ency in the financial system (up 15 places in 2016 from 2015). • Tax regulation was found to be the most problem- atic factor for doing business as per the WEF re- port, while corruption emerged as the second most problematic factor (see Figure 2). Notably, inflation also figured amongst the top 5 most challenging factors for doing business.
  10. 10. 11 FOCUS OF THE MONTH NOVEMBER 2016 India Moves up in World Bank’s ‘Ease of Doing Business’ Ranking I ndia improved its ranking from last year’s 131 (re- vised) to 130 out of 190 countries in the World Bank Doing Business 2017 report, which was released last month. New Zealand emerged the best country for doing business. The report recognised India’s achieve- ments in implementing reforms in four out of ten indica- tors- trading across borders, getting electricity, enforc- ing contracts and paying taxes. This is the first time in history that India has been recognised for improvement in the two indicators. The Doing Business report ranks As table 2 shows, out of the 10 indicators, India made the sharpest jump in “getting electricity”, with its rank jumping 44 spots to 26 in the 2017 report of World Bank. “India made getting electricity faster and cheaper by streamlining the process of getting a new commercial electricity connection,” the World Bank highlighted in the latest report. India’s rank also improved in the “en- forcing contracts” parameter by 6 spots to 172. “India made enforcing contracts easier by creating dedicated divisions to resolve commercial cases,” the World Bank said in its report. countries on the basis of Distance to Frontier, an abso- lute score that measures the gap between India and the global best practices. India’s absolute score improved from 53.93 to 55.27 in the previous year. This is the first time in history that India has improved its absolute score in two consecutive years. Additionally, India’s Distance to Frontier score improved on 6 out of 10 in- dicators, showing that India is increasingly progressing towards best practices. Though India’s ranking in “paying taxes” deteriorated by 15 spots to 172, the World Bank elucidated that India had made paying taxes easier by introducing an elec- tronic system for paying employee state insurance con- tributions. Further, India’s ranking in “trading across borders” also fell by 10 spots to 143 in the 2017 rank- ings, though the World Bank recognized that India’s re- forms in making imports and exports easier through the launch of the ICEGATE portal and simplifying border and documentary procedures.
  11. 11. ECONOMY MATTERS 12 FOCUS OF THE MONTH The ranking of India is likely to improve going forward in response to the slew of reform measures implemented by the government of India in the last two years which has made it easier for the businesses to start, operate and exit. Some of the laudable measures introduced by the government, but which were not considered by the World Bank in their rankings are as follows: - The elimination of the requirement of a company seal while applying for government registrations and permissions at the time of setting up of a busi- ness. The Companies Act, 2013 was amended in 2015 to make provision for the same. - Online registration for ESIC and EPFO, which has ex- pedited the time to register. This functionality has been made applicable from 1st December, 2015. - Online filing and payment of returns at the Employ- ee’s Provident Fund Organisation (EPFO), where the majority of returns and payments are now filed and paid fully online. It was implemented by EPFO on 5th June, 2015. - Streamlining of name reservation process at Minis- try of Corporate Affairs (MCA), which has reduced the time taken to an average of 1.86 days. - Registration under VAT and Profession tax has been merged into a single process from 1st January, 2015 by Government of Maharashtra. - Registration for VAT in Delhi has been made online and is allotted real time because of which business can start operations immediately on receipt of the TIN number. - Delhi Pollution Control Committee has removed the requirement of obtaining consent to establish for a non-hazardous warehouse. - Time required to get electricity connection has been reduced to 15 days in both Mumbai and Delhi. The government of India remains committed to its goal of achieving the top 50 rank in the ‘Doing Business’ re- port in the coming years. Action is already being taken to implement further reforms with an eye on next year’s ranking. Some of these steps being taken by the government are enumerated below: i). Implementing Goods and Services Tax (GST) nation- wide by April 1, 2017. ii). Implementing the Insolvency and Bankruptcy Code by notifying regulations and institutionalizing pro- ceedings at the National Company Law Tribunals. iii). Implementing a single form for company incorpora- tion, name availability and director’s identification number and making it mandatory. iv). Merging registries of charges at MCA and CERSAI into a single registry to build a unified online data- base of security interests over movable assets. v). Introduction of paperless court procedures and sys- tems including e-filing, e-payment, e-summons and downloading of electronically signed orders in com- mercial courts. vi). Further streamlining processes related to customs clearances to bring about faster and cheaper pro- cessing time including increase in direct delivery of good and integrate clearances/NOCs of all agencies for both exports and imports. vii). Allowing online filing of application, scheduling of appointments and payment of fees for registering properties. viii). Digitising all encumbrances and record of rights of land for the last 30 years and making them available online. ix). Integrating land records with the sale deeds at the Sub-Registrar offices. x). Making color coded maps of Airports Authority of India, Delhi Urban Arts Commission, Delhi Metro Rail Corporation, Archaeological Survey of India GIS enabled and integrating them with the Single Win- dow System of Municipal Corporation of India.
  12. 12. 13 FOCUS OF THE MONTH NOVEMBER 2016 Assessment of State Implementation of Business Re- forms 2016: Report by DIPP & World Bank T he Department of Industrial Policy and Promo- tion (DIPP), Ministry of Commerce and Industry, in partnership with the World Bank Group, re- cently released the results of the Assessment of State Implementation of Business Reforms 2015-16. As per the rankings, Andhra Pradesh and Telangana jointly topped the rankings relegating Gujarat, last year’s top ranker, to the third spot. The national implementation of reforms average stood at 48.93 per cent, significantly higher than last year’s national average of 32 per cent. This demonstrates the great progress made by States this year. The Assessment of State Implementation of Business Reforms studies the extent to which states have imple- mented DIPP’s 340-point Business Reform Action Plan (BRAP) for States/UTs 2015-16, covering the period July 1, 2015 to June 30, 2016. The BRAP includes recommen- dations for reforms on 58 regulatory processes, poli- cies, practices or procedures spread across 10 reform areas spanning the lifecycle of a typical business. Data for this assessment was collected from State Govern- ments on the BRAP portal. The portal, among the first of its kind globally, allowed State Governments to submit evidence of implemented reforms. At least 32 States and UT Governments submitted evidence of im- plementation of 7,124 reforms for the year 2016. These submissions were reviewed by the World Bank team and validated by DIPP’s team to study whether they met the objectives of the BRAP.
  13. 13. ECONOMY MATTERS 14 FOCUS OF THE MONTH The highlight of the implemented reforms during this period is as follows: • Single Window Systems: Various States have cre- ated a dedicated body/bureau as a one-stop sys- tem for State level regulatory and fiscal incentive approvals. The online single window system has a provision for filing applications, payment, status tracking, online scrutiny and approval of applica- tions. The officials of the Body/Bureau have also been given powers to grant approvals. - States include: Andhra Pradesh, Chhattisgarh, Gujarat, Haryana, Jharkhand, Madhya Pradesh, Maharashtra, Punjab, Rajasthan, Telangana, Uttarakhand. • Tax reforms: States have made good progress in tax reforms. These include mandating e-registra- tion for Value Added Tax (VAT), Central Sales Tax (CST), Professional Tax, Entry tax, etc, allowing online payment and return filing; providing e-filing support through service centers and helpline and risk-based tax compliance inspections. - States include: Bihar, Chhattisgarh, Gujarat, Karnataka, Madhya Pradesh, Maharashtra, Odisha, Punjab, Rajasthan, Uttar Pradesh, Ut- tarakhand, West Bengal. • Construction permits: Many States have allowed applicants to apply online and upload building plans for automated construction permit approval. In addition, several states have developed AutoCAD- based systems that automatically scan building plans and monitor compliance with the building bye-laws and building codes in force. - States include: Andhra Pradesh, Chhattisgarh, Gujarat, Haryana, Madhya Pradesh, Maharash- tra, Rajasthan, Telangana, Uttarakhand. • Environment and labour reforms: States have also implemented advanced automated solutions to deal with environmental and pollution related ap- plications and approvals. These solutions provide- shassle free, 24 X 7 e-access to businesses to apply online, track applications, file returns and state- ments and get online permissions under various Acts and regulations. - States include: Andhra Pradesh, Bihar, Chhat- tisgarh, Gujarat, Haryana, Jharkhand, Karna-
  14. 14. 15 FOCUS OF THE MONTH NOVEMBER 2016 taka, Madhya Pradesh, Maharashtra, Odisha, Punjab, Rajasthan, Tamil Nadu, Telangana, Ut- tar Pradesh, Uttarakhand, West Bengal. • Inspection Reforms: A number of inspection re- forms with regard to labour, tax and environment related compliances have been introduced across the States to help businesses comply with inspec- tion requirements in a user friendly manner. To bring in transparency, the states have also pub- lished comprehensive procedures and checklist for various inspections and have implemented online systems for allocation of inspectors to increase ef- ficiency and effectiveness of the procedure. - States include: Andhra Pradesh, Chhattisgarh, Gujarat, Haryana, Jharkhand, Karnataka, Mad- hya Pradesh, Odisha, Punjab, Rajasthan, Pun- jab, Telangana, Uttar Pradesh, Uttarakhand. • Commercial disputes and paper-less courts: There has been significant progress this year in the area of judicial reforms compared to last year, particu- larly due to the passage of the Commercial Courts, Commercial Divisions and Commercial Appellate Divisions Act. To address the concern of time and costs associated with various legal processes, Dis- trict Courts in various states have also made the provision of making online payments, e-filing and e- summons. Few States have also filled up vacancies in District Courts/commercial courts to ensure avail- ability of adequate capacity for dealing with various cases. - States include: Andhra Pradesh, Chhattisgarh, Gujarat, Haryana, Jharkhand, Madhya Pradesh, Maharashtra, Rajasthan, Telangana. However, the present evaluation also highlights the need to properly communicate, monitor and evaluate these reforms to ensure that their impact is being felt on the ground.
  15. 15. ECONOMY MATTERS 16 FOCUS OF THE MONTH Enforcing Contracts: Need to Improve the Ju- dicial Ecosystem I t is well recognized that speedy dispute settlement mechanism, implying fair and speedy court trials, would improve contract enforcement for businesses and governments. However, at present, commercial disputes before courts in India are among the most lengthy, complex and costly globally, let alone in South Asia. This delay in enforcing contracts is one of the big- gest reasons why Indian citizens, especially the poor, are prevented from speedy justice. Our judicial ecosystem, especially at the district and sub- district levels in India, is largely responsible for abysmal contract enforcement in India. Our judiciary takes an inordinately long time for disposing judicial cases and enforcing contracts. Hence, it is virtually impossible to conclude a case within a reasonable timeframe. The system of multiple appeals and revisions, numerous interim and interlocutory applications and generously granted adjournments contribute to the cost of litiga- tion and delays. Indeed, a civil case trial (including ap- peals) can stretch to decades. Contract enforcement, status in India In the Doing Business rankings of the World Bank (WB), there are ten parameters for ranking the various coun- tries. These include starting a business, dealing with construction permits, getting electricity, registering property, getting credit, protecting minority investors, paying taxes, trading across borders, enforcing con- tracts and resolving insolvency. The first eight relate to different parts of government - the executive and legislature at union, state and local levels. The last two, enforcing contracts and resolving insolvency are closely linked to judicial efficiency (or inefficiency) for final reso- lution. Indeed, insolvency is a special kind of contract, and rarely enforced in India. In effect, lack of contract enforcement in India hurts resolving insolvency as well. The World Bank’s contract enforcement parameter is measured as ‘effective commercial dispute resolution’ - a breach of a sales contract between two domestic businesses through a local first-instance court. This as- sumes that there is no appeal to the judgement in or- der to enforce the contract. To quote the WB study, ‘Speedy trials are essential for small enterprises, which may lack the resources to stay in business while await- ing the outcome of a long court dispute.’ This is espe- cially relevant in India where most enterprises are small and medium in nature and need a facilitative environ- ment for growth. In the ‘contract enforcement’ parameter of Doing Busi- ness, out of 189 countries ranked in 2015, India had till recently been ranked 186, ahead of only Angola, Bang- ladesh and Timor-Leste. However, in the latest Doing Business rankings, India has improved its ranking to 172 out of 190 countries. To give a BRICS perspective, on contract enforcement, China is ranked 5th , Russia is 12th, Brazil is 37th, South Africa is 113th, and India is 172nd. The top five countries in this parameter are Korea, Sin- gapore, Australia, Norway and China. As per the 2016 data on India’s contract enforcement, from Mumbai and Delhi, it takes an average of 1420 days to enforce a contract compared to only 164 days in the global leader, Singapore. The OECD high income average of enforcing a contract is 553 days. Let us re- mind ourselves that 1420 days (almost 4 years) is the time taken in our largest megacities like Mumbai and Delhi; the time taken in the lower income states in India would perhaps be much higher. At the same time, the cost of enforcing the contract as a percentage of the claim stands at a whopping 39.6 per cent of the claim, which combined with the delayed enforcement is a dou- ble whammy. Incidentally, Greece takes longer at 1580 days, which is probably one of the reasons why that country suffers from weak economic indicators.
  16. 16. 17 FOCUS OF THE MONTH NOVEMBER 2016 Problems due to ineffective contract en- forcement a. Lack of trust and predictability: Lack of contract enforcement leads businesses to rely much more on trust and limited networks. This is a huge constraint on the Union government’s flagship programmes such as ‘Make in India’ and ‘Digital India’, since young entrepre- neurs with their start-ups are deprived from entering into contracts with the wider business ecosystem. Good contract enforcement is one of the fundamental pillarsofbuildingastrongeconomy.Apartfromasigned contract, oral contracts are also valid under the Indian Contract Act 1872, which has a Chapter VI, sections 73- 75, outlining the consequences of breach of contract. Other Acts lay down process of contract enforcement. However, seldom are these processes enforced quickly. International investors, especially long-term investors like pension funds and sovereign wealth funds are ap- prehensive about delays in contract enforcement in In- dia. They point to other studies on ‘Rule of Law’ across economies published by the World Economic Forum, and want additional guarantees for their investments. But Indian business, especially the small entrepreneur, struggles due to this lack of trust and predictability dai- ly. b. Increasing costs and inefficiency: Most parties enter into contracts after considering and pricing the addi- tional risk of the eventuality of the contract being dis- honored. Hence a lender does not trust the contract and loan documents. She builds in structures and collat- eral so that the cost of non-repayment is higher than the cost of repayment. The high cost of contract enforce- ment, at nearly 40 per cent, is built into the pricing for every contract, leading to cost escalations all around. As an example, the recourse for a bounced cheque in, say Dubai is immediate imprisonment. In India, a bounced cheque would take years to resolve through the judicial system. Hence payment security mechanisms are more complex and unwieldy. c. Perverse incentives to game the system: Lack of contract enforcement discourages companies and busi- nesses from playing fair, and using ethical best practic- es in business. This prevents good professional business practices, and is a disincentive to responsible corporate behavior. It encourages the ‘Chalta hai’ and ‘Jugaad’ at- titude present in several businesses and governments. For government contracts, bidders put in unrealistic bids to ‘bid and win, and then renegotiate’ – such be- havior is squarely because their security deposit is not forfeited on defaulting on the bidding contract. Simi- larly, large companies enter into subcontracts with Tier 2 and Tier 3 suppliers and subcontractors. These sub- contracts are seldom enforceable, and very often the subcontractors suffer delayed payments from the large companies. This leads to most stakeholders exploiting the system. d. Making Indian judicial recourse uncompetitive: Sev- eral courts outside India have commented on the slow pace of decision-making in Indian courts. Most con- tracts with international parties specify the place of arbitration as Singapore or London. Even after such ar- bitral awards, the enforcement of the award must be carried out in Indian courts. This has led to the entire market for arbitration and alternative dispute resolu- tion to move out of India, hurting business for Indian legal professionals. How to ensure quicker contract enforcement The Union government has taken a few steps, some of which are as follows: a. The Commercial Courts, Commercial Division and Commercial Appellate Division of High Courts Act has been passed for speedy adjudication of high- value commercial transactions, with a value of over Rs. 1 crore. This is too high for SMEs, though. b. Arbitration and Conciliation act, 1996 has been amended to ensure quicker arbitration awards. However, much more needs to be done. Some sugges- tions include the following: - We need much more investment in court infrastruc- ture and each state High Court should oversee its district and sub-district courts move towards tech- nology enabled e-courts and tribunals. - Both the Judiciary and the Executive need to work together to streamline legal processes, limit ad- journments, use technology in case management and taking evidence and for delivering final orders. - Between the Bar and the Bench, the bar, i.e. the legal profession needs to introspect and move to- wards measures to discourage delays and adjourn- ment seeking. - The Legislature and Executive need to simplify laws, following the ‘Simple English’ movement followed in some countries, to ensure less litigation. Finally, enforcing contracts is not exactly the most glam- orous subject, but is a necessary and critical infrastruc- ture for every business. This aspect needs to be given the attention it deserves, both by the legal ecosystem and other parts of India’s governance structure. India would be a frontrunner in the ease of doing business only when it has a strong legal system with machinery for quick contract enforcement and dispute resolution. (Views expressed are personal)
  17. 17. ECONOMY MATTERS 18 FOCUS OF THE MONTH Reforms in Customs Procedures to Improve Ease of Doing Business I nternational trade is the key driver of economic de- velopment, and Customs has a significant role in free flow of international trade. No doubt, revenue collec- tion and cross-border enforcement of allied laws relat- ed to import and export control, national security, pro- tection of Indian heritage, flora and fauna etc. continue to be the core competency of customs. Nevertheless, trade facilitation and ensuring security of international trade supply chain are equally important responsibili- ties of customs. Keeping these responsibilities in mind, Indian customs has gone for more and more use of technology in customs assessment of goods since mid – eighties. It all started with the introduction in 1985 of Sperry Map- per System, an off line data entry based assessment. The computerization process was speeded up when the In- dian Customs EDI System (ICES) was introduced in 1995. The ICES is an EDI- based automated workflow system for clearance of import and export consignments. The ICES enabled on- line acceptance and processing of Cus- toms documents and electronic exchange of informa- tion with organizations like RBI, DGFT, regulatory agen- cies etc. This was followed by introduction of ICEGATE, an e-commerce gateway in 2002. It facilitated e-filing of Customs documents. Thus, the ICES and ICEGATE to- gether facilitated online processing, web based track- ing, help desks and touch screen kiosk for importers to know the status of their documents etc. The next major Customs modernization was achieved in 2005 through Risk Management System (RMS), a System based assessment of risks. The RMS aimed to achieve optimal balance between facilitation and en- forcement by driving down the dwell time for Customs processing and the transaction costs, while simultane- ously promoting the culture of compliance. As a result of the RMS based assessment, only the Bills of Entry hit by targeting based on certain risk based analyses were taken up for closer scrutiny , the rest moving seam- lessly to the following stages till the time duty was paid and representative sample was examined by Customs. Soon, the facility of e-payment of Customs duty intro- duced in 2006 made things even better. Meanwhile in 2005, as a measure of facilitation, prefer- ential treatment was meted out to the importers with good track record through Accredited Clients Program (ACP). This facilitation was extended even much before the World Customs Organization (WCO) talked of Au- thorized Economic Operators which will be discussed soon. The setting up of data warehouse was another milestone in the progress of modernization of Customs. It provided the information needs of Customs Depart- ment as well as external users. Other smaller but equal- ly significant initiatives were Courier (Express Cargo) Automation, Advance Passenger Information System (APIS) for expeditious air passenger clearance etc. After the RMS stabilized, and so did the National Import Data Base (NIDB) meant for checking undervaluation, it was time for further drastic reforms. Thus, self-assess- ment in Customs was introduced in 2011. The importers filed the Bills of Entry electronically sitting at their of-
  18. 18. 19 FOCUS OF THE MONTH NOVEMBER 2016 fice, did the self assessment himself and made the duty payment electronically based on his assessment, and then followed the subsequent procedures, again elec- tronically. In a case where the flow of the Bills of Entry was not interrupted through laid down targeting proce- dure, the importer proceeded to the docks examination shed to get a percentage of the goods examined to en- sure that the goods were as per declaration, and there- after walked away with the imported goods in less than a day’s time. Only around ten per cent of the imported goods got hit by the aforesaid targets which were then taken up for closer scrutiny. Meanwhile, the WCO came up with SAFE Framework of Standards (SAFE FOS) in 2005, and suggested to facilitate the legitimate trade while at the same time securing borders from unlawful trade. This was to be achieved through the dual measures of Customs to Business Partnership and Customs to Customs Net- work. In the process there was the birth of Author- ized Economic Operator (AEO) scheme. The idea was to provide facilitation to the stakeholders with proven track record. Since in imports and exports there is the involvement of two Customs Administrations - one at the exporting country, and the other in the importing country, there was the inherent need for both the Cus- toms Administrations to recognize each other’s AEOs. So there was the need to have Mutual Recognition Ar- rangements (MRAs) between the two Customs Admin- istrations. The idea of introducing AEO scheme in India was first crystallized in 2011. After many improvements, the main attractions for the AEO scheme can be said to be as follows: Option for deferred duty payment, direct port deliveries for import and export, fast tracking of refunds, drawbacks and adjudications, recognition by partner government agencies etc. The AEO scheme is not restricted to importers and exporters only. It is also extended to other economic operators like logistic ser- vice providers, custodian and terminal operators, cus- toms brokers, warehouse operators etc. For Indian Customs, the reforms have always been ‘work in progress’. The most significant reform in the realm of clearance of goods through different regula- tory agencies at the port has been the launching of Customs Single Window Interface for Facilitating Trade (SWIFT) clearance in 2016. The Customs SWIFT enables importers/exporters to file a common electronic ‘Inte- grated Declaration’ on the ICEGATE portal. The Inte- grated Declaration takes care of the requirements of Customs, FSSAI, Plant Quarantine, Animal Quarantine, Drug Controller, Wild Life Control Bureau and Textile Committee and it replaces nine separate forms required by the said 6 different agencies including Customs. With the roll-out of the Single Window, CBEC also introduced an Integrated Risk Management facility for Partner Gov- ernment Agencies (PGAs), which will further improve ease of doing business. The Integrated Risk Manage- ment System will ensure that consignments are not se- lected by agencies routinely for examination and test- ing but based on the principle of risk management. With this development, Indian Customs is amongst a few se- lect countries that have functional Single Window clear- ances, inclusive of multiple PGAs and integrated risk based selection. Certain other minor but significant Customs reforms undertaken in the recent past include the use of ‘Digi- tal Signature’ for filing of declarations of importers, exporters, Customs brokers and for filing manifests by Shipping Lines and Airlines. The number of documents required for export and import has been reduced to three, namely Electronic Declaration, Invoice cum Pack- ing List and Bill of Lading. Besides, introduction of electronic messaging system between shipping lines and Custodians for Electronic Delivery Orders instead of a paper based delivery has also helped the trade. Further, 24 X 7 Customs clearance facilities have been extended to 19 Sea Ports and 17 Air Cargo Complexes across the country. The provision of Deferred Duty Payment for select categories of import- ers and exporters introduced recently has also enabled speedier release of cargo without payment of duty and provided more liquidity in hands of the business. In or- der to address the issues relating to Customs clearance and the need for upgrading infrastructure that could impact clearance, Customs Clearance Facilitation Com- mittee (CCFC) has been set up at every major Customs station.
  19. 19. ECONOMY MATTERS 20 FOCUS OF THE MONTH (Views expressed are personal) Finally, Indian Customs has been taking the lead in the international arena in respect of trade facilitation in a systemic manner. Realising the importance of exchange of information amongst Customs Administrations, In- dian Customs has been pitching for Globally Network Customs (GNC) in the WCO meetings right since 2008. The GNC was the first building block of the ‘Customs in the 21st Century’ vision approved by the WCO in 2008. Simply speaking, GNC is a standardized way for Cus- toms Administration to share information based on en- hanced Customs cooperation. This will facilitate quicker Customs clearance based on the on-line information about the imported goods from the Customs Adminis- tration of the exporting Country. Once the GNC is fully operational, the dream of a Shipping Bill at the export- ing country getting translated into Bill of Entry in the importing country would get fulfilled, thus facilitating the trade to the maximum extent. The aforesaid reforms had a positive impact on time and cost required for export and import. The impact is vis- ible in the improved scorecard of India in Logistics Per- formance Index, a survey done by World Bank Group on trade logistics. India has moved up 19 positions (from 54 to 35) in LPI rank and Indian Customs has moved up by 27 positions (from 65 to 38) in 2016 report as compared to 2014 report. Even in the report by World Economic Forum on Burden of Customs Procedures, Indian Cus- toms has made significant progress by moving up from 54th to 37th position in the ranking. Business Report 2017, by World Bank has recognized the implementation of the Single Window Interface for Trade. Thus, Indian Customs would do well to continue with its modernization efforts so as to provide further ease of doing business. [The author is former Chairman, CBEC and Senior Advisor to ITIC, Washington D.C. He is also engaged with a EU Project in India on GST and with Myanmar Government for their Indirect Tax Reforms]
  20. 20. 21 FOCUS OF THE MONTH NOVEMBER 2016 Book Review: India the Business Opportunity by Dr. Linda Spedding, Eastern Book Company (2016) T he business world today is facing a global slump with developed nations growing at an ordinary rate of 2-4 per cent annually. Amid the sluggish milieu, one country that manages to defy that trend is India. With its growth rate consistently in excess of 7 per cent it has become the fastest growing economy of the world. The galloping rate with which India is progressing has caught the attention of the world and has made it an investor magnet. This is the sentiment that echoes in the introductory chapter of the book, ‘Overview’, “The world is looking at India, looking to it”. The current situation being so triggers the need for the world to know India better, to understand In- dia better. The book is in the form of a compilation of chapters each dealing with a particular issue related to doing business in India. Thus it is an attempt by au- thors of the various chapters to achieve the same and is written with a spirit to build a holistic understand- ing of the reader in fields impacting business in India. The 1st chapter is an overview that acquaints the reader with (a) how establishing a business needs to begin with an understanding of foreign exchange and how it is monitored in India by three regulatory bodies i.e. the Reserve bank of India (RBI), Department of Indus- trial Policy and Promotion (DIPP) and the Foreign In- vestment Promotion Board (FIPB) (b) what the differ- ent laws regulating business in India are, for example, Company law, the employment of manpower under the various Labour laws, the Intellectual property regime and the Competition Act (c) the system of taxation in India - The two types of taxes (direct and Indirect) and how the Goods and Sales tax (a unified taxation system for indirect taxes) is in the offing and (d) the hi- erarchy and network of courts in India i.e. Trial courts, High Courts, Supreme Court and specialized Tribunals. The 2nd chapter being the most topical one discusses (a) the types of legal entities i.e. corporations, private com- panies, public companies, sole proprietorships and LLPs - their nature and functioning according to domestic laws (b) alternate entry points for formation of legal en- tities i.e. joint ventures, franchise agreements and port- folio investments (c) Foreign Direct Investment and its regulatory framework in 5 major sectors namely retail, insurance,telecommunications,realestateandbanking. The Editor herself writes the 3rd and 4th chapter, which touch the ‘social’ and ‘psychological’ elements of the consumer-supplier relationship. The chapters deal with (a) corporate responsibility – how there is a greater demand for transparency and the shift in business psyche from ‘profit for stakeholders’ to ‘reputation management discussion’ / ‘assessment of impact of policies’ (b) advantages of adopting a corporate so- cial responsibility model fulfilling sustainable practices for optimizing natural resources, employees and the environment (c) how we need to protect and reward whistleblowers. Dr. Spedding notes that the Indian parliament has initiated a Whistle Blowers Protection bill that has not acquired the status of a law (Act) and there exists a void for a law catering to the subject (d) importance of ethics in business and how there is an increased need for transparency and accountability in India due to proliferation of business in recent times and (e) an illustrative account of mishaps across the globe and their consequences which underline the significance of ‘reputational risk’ in business today. The 5th chapter caters to the facilitation and execution of plans of big-ticket corporates operating in India by ‘mergers and acquisitions’. The author here draws a legal map on how the mergers take place in India. The contents range from (a) the different investment instruments in India (i.e. equity shares, preference shares, debentures and share warrants) and condi- tions a foreign investor must meet to purchase these instruments (b) due diligence – how the exercise aids in creating awareness about the business plans, cus- tomers, contracts, etc and avoids non-compliance of legal provisions (c) an illustrative account of major im- pediments that often arise in mergers and acquisitions (d) preliminary information about options to liquidate the investment and follow the exit route (e) the proce- This is a practical handbook for understanding the legal and regulatory affairs in India in order to do business in India.
  21. 21. ECONOMY MATTERS 22 FOCUS OF THE MONTH dure of acquisition of shares of a private company or public company and the limitations attached with it (f) the 3 popular modes of acquisitions i.e. slump sale, as- set transfer and share acquisition (g) how acquisition of listed companies require additional compliances. The 6th and 7th chapters talk about raising capital for eq- uity and debt respectively, they familiarize the reader with the different routes an investor can take to accu- mulate ‘equity capital’ i.e. (a) an initial public offering (b) Global Depository Receipts (c) Qualified Institutions placement (d) Rights issue and (e) bulk and block deals. After the difference is carved out between equity capi- tal and debt financing the author covers Debt financing from the stage of creating a ‘Charge of over the prop- erty’ to the final ‘Enforcement of claims’ in the even- tuality of a default of payment. The reference to the ‘Proposed Bankruptcy Code 2015’, which has recently attained the status of a law, assumes great relevance since the new legislation seeks to transform debt re- covery in India and even according to the World Bank report on the ‘Ease of doing business’; India has been rated low on the global debt recovery index. In this backdrop, the illumination on debt recovery would be well received, as it constitutes one of the major conditions the investors consider before investing. Chapter 8 deals with corporate governance. It starts with the fact that India has borrowed most principles/ norms from developed economies like UK and USA but there is variance on account of application of those norms in India. The Author has explained the structure of a company and its operations by dint of domestic le- gal provisions. There is also a demonstration by draw- ing a time line of events proving that Corporate Gov- ernance principles are still in the state of evolution in India, for example the ‘Compensation Awarded to Ex- ecutives’ is still rising compared to developed markets and ‘Related Party Transactions’ have only recently been put under regulation in Companies Act 2013. Chapter 9 discusses Labour and Employment Laws. This area is very important for an investor because af- ter the initial investment every business requires skilled labour regulated by domestic laws for smooth and sta- ble functioning of their enterprise. The Constitution of India empowers both State government and Central government to enact laws relating to employment. The chapter deals with a total of 20 Central laws that moni- tor the employee-employer relationship. The author explains (a) various types of employees, (b) certain uni- form conditions of service applicable across the board that are paramount because they are inducted in the governmental ‘Standing Orders’ (c) types of employ- ment contracts i.e. permanent, temporary, probation, casual, etc. (d) all incidental avenues of employment, for example, salaries, allowances, occupational health standards, compensation, pension, etc. (e) concepts of ‘retrenchment’ of employees, ‘closure’ of any un- dertaking, ‘laying off’ an employee and ‘strike and lock- out’ declared by workers which are essential because they generate majority of the litigation in Labour law. Chapters 10 and 11 are on topics that have gained im- portance in recent times and have just begun devel- oping in India such as Intellectual Property Rights (IPR) and Competition law. The intellectual prop- erty law in India consists of trademarks, copyright, patents, designs and geographical indications. The Author has dealt with each of the instruments by discussing (a) their largely similar procedures for ob- taining protection in India (b) the grounds for refusal of the application seeking protection of rights (c) registration of rights to protect the property (d) ac- tions to revoke registration of the protected property. The Author then deals with the historical evolution of the MRTP Act, 1969 (Monopolies and Restrictive Trade Practices) to the Competition Act, 2002 operational in India today. What investors and analysts would un- derstand from the discussion is - the major impedi- ment of lack of evidence against cartels, the process of complaints /investigation of alleged combinations and the trend of horizontal agreements being sub- jected to stricter scrutiny than vertical agreements. Chapter 12 is a critique on the condition of Indian in- frastructure. The author tells the reader how there is a pressing need for improvement in various de- partments of infrastructure especially in the current state of affairs where investors, domestic and for- eign are desirous of setting shop in India. The discus- sion aims to suggest a solution to this problem by encouraging the government to use the PPP route, which has been followed in a few cases in the re- cent past i.e. development of the National Highways. Chapter 13 and 14 deals with Tax, which is, one of the most important aspects considered by investors be- fore investing monies. There are chapters dedicated to both types of taxes i.e. Direct and Indirect tax. As far as Direct taxes are concerned, the author enunci- ates how tax operates in various commercial dealings - (a) the implications of tax in case a foreign invest- ment has to enter India (b) taxation in case of cross
  22. 22. 23 FOCUS OF THE MONTH NOVEMBER 2016 border trade with India (c) tax implications during corporate transactions of acquisition, merger, etc. The appraisal of the ‘Proposed Good and Services Tax’ in India is much needed in the Indirect Tax de- partment as it is aims at reforming the flaws of the current taxation system. An understanding of the new proposed regime is essential because it is just a matter of time till the NDA would have suf- ficient numbers in the Rajya Sabha to pass this bill. Chapter 15 deals with Arbitration, which is the pre- ferred mode of dispute resolution in light of the surg- ing pendency in courts. As a consequence, all con- tracts invariably have an arbitration clause in today’s day and age. The Author dwells on a journey from ‘drafting an arbitral agreement’ to ‘enforcement of an award’. The same provides a reasonable idea about the benefits of arbitration and apprises the reader about the options/choices parties have with regard to the procedure to be followed, institute selected for the arbitration, appointment of the arbitrator, etc. Chapter 16 talks about Environment law, the Author cautions investors about the painstaking exercise of obtaining clearances in India. The same also finds re- verberation in the World Bank Report on ‘Ease of Do- ing Business 2016’ (that is compiled on various param- eters inclusive of environmental clearances) under the title ‘dealing with construction permits’, as per the rat- ings, India is ranked at 183, which is, one of the worst in the world. The same is attributed to the number of procedures that need to be complied with ‘before construction can commence’ for instance, in India the number of procedures are 40 on an average compared to 12 in OECD countries. Despite that being the case, no concrete steps have been taken by the govern- ment to change the scenario, making it all the more important to know and comply with these procedures. InChapter17,theAuthortalksaboutCyberlawsandhow the government of the day has recognized the boons of internet and has provided access to all ‘Stage-agencies’ online. The intent of the Prime Minister is manifest in the digital India campaign where the agenda is to connect the entire country through the internet. The Author has discussed the importanceof intermediaries as ‘reposito- ries of data’ and the provisions ‘protecting private/con- fidential data’. Cyber laws may not be directly related to business but since the world is moving to an E-platform making it the preferred mode of transactions today, one must be abreast with the developments in this field. The book culminates with a deduction and summary of the business opportunity in India in light of the above chapters. Dr. Spedding has applauded the Modi govern- ment for the initiatives taken to make the environment conducivetocommercialdevelopment,suchas–(a)skill development of our young population, (b) expenditure on roads and ports to improve connectivity, (c) making all state services available on an E-platform, (d) initia- tion of the GST bill, (e) promoting the ‘Make in India’ campaign, (f) supplying power to businesses, etc. The Author in the presence of certain pitfalls like infrastruc- ture, uneven development, illiteracy and unskilled pop- ulation forecasts a bright future at the horizon for India. This book comes at an opportune time and provides the reader the much-needed comprehensive understand- ing of the Indian market dynamics. Dr. Linda Spedding being an aficionado in the comparative commercial sphere adds another edition to her oeuvre in 18 chap- ters spread over 700 pages. The theme of the book is to touch major aspects that ought to have a bearing on business in India either directly or indirectly. The as- signing of chapters on niche areas to advocates prac- ticing in those very subjects has given greater depth to the book. One appreciable pattern in every chapter is the ease with which the Authors start to explain the basic concept and slowly graduate from an elemen- tary level to a professional level. With the increasing awareness/knowledge/specialization in field specific work today, ‘India – The Business Opportunity’ comes as an ideal capsule for investors, analysts and lawyers alike because it gives a detailed account of all laws impacting Indian commerce in a single compilation. Chritarth Palli is a Law Clerk cum Research Assistant to Hon’ble Justice T.S. Thakur, Chief Justice of India and an Assistant Editor of India Law Journal. (Disclaimer: This book review has already been published by India Law Journal (ILJ) and has been republished by us with prior permission from ILJ. ILJ still retains the copyright to the book review.)
  23. 23. 25 DOMESTIC TRENDS GDP Growth Stabilises in 2QFY17 NOVEMBER 2016 G DP growth in the first quarter of the current fis- cal came in at 7.3 per cent as compared to 7.1 per cent posted in the previous quarter, while Gross Value Added (GVA) at basic prices posted growth of 7.1 per cent in 2QFY17 as compared to 7.3 per cent in 1QFY17. With this, the first half GDP growth stood at 7.2 per cent as compared to 7.5 per cent in the same period last year. The sectoral data print reveals interest- ing insights into the data. Even as investment growth continued to contract for the third consecutive quarter in 2QFY17, private consumption expenditure growth quickened while government expenditure growth con- tinued to post double-digit growth. Going forward, pay commission payouts, contained inflation, and easy monetary conditions are expected to support demand in the economy. From supply side, GVA growth strongest in services From the supply-side, agriculture growth accelerated to 3.3 per cent in the 2QFY17 as compared to 1.8 per cent growth in 1QFY17. Farm growth picked up in line with good kharif harvest thanks to bountiful monsoon re- ceived this year. Industrial growth moderated to 5.2 per cent in the July-September 2016 quarter from 6.0 per cent posted in the previous quarter. Within industry, all sectors except construction witnessed lower growth in the second quarter as compared to the first quarter. Though, services sector growth marginally decelerated to 8.9 per cent in the reporting quarter as compared to 9.6 per cent in 1QFY17, it continued to remain relatively healthy helped by robust government spending.
  24. 24. ECONOMY MATTERS 26 DOMESTIC TRENDS Consumption continues to outpace invest- ment At market prices, private consumption expenditure ac- celerated to 7.6 per cent in 2QFY17 as compared to 6.7 per cent in the previous quarter. A good monsoon this year has powered rural income which in turn has sup- ported private consumption growth. Though, govern- ment spending growth moderated to 15.2 per cent in the July-September 2016 quarter as compared to 18.8 per cent in the previous quarter, but it still remained ro- bust. The worrying aspect on the expenditure front was the fact that the contraction in gross fixed capital for- mation has intensified and this is the third consecutive quarter of de-growth. Even with an accommodative monetary policy, substantial improvement in this sector is still probably far away. Exports growth continued to remain weak during the quarter. tive for the economy. The transition of the informal economy into a formal one is likely to be progressive as it would help to widen the tax base which in turn will boost consumption demand. Going forward, the recent demonetisation drive of the government is likely shave off a few percentage points from the GDP in the next few quarters. However, the long-term impact of this move is expected to be posi- Outlook The moderate uptick in GDP growth to 7.3 per cent in Q2FY17 as against 7.1 per cent achieved in the previous quar- ter is noteworthy. The pickup in growth, which has been helped by higher output of agriculture and construction sectors, is a confidence booster and point towards the re-emergence of growth impulses in the economy. The num- bers point to the continuing dependence on consumption and public spending to revive demand while investments are showing a declining trend as compared to last year. The demonetization move will act as a temporary setback to growth in the coming quarter but CII expects a rebound in investment, going forward, as the government is tak- ing decisive measures to bring transparency in the system and is committed to improve the investment cycle which would ultimately take the economy to the double-digit growth trajectory in the long-run.
  25. 25. 27 DOMESTIC TRENDS NOVEMBER 2016 Manufacturing sector posts positive growth after two consecutive months of decline The manufacturing sector posted growth after two con- secutive months of contraction. Manufacturing sector which has the highest weight among all the industrial output sub-sectors grew by 0.9 per cent in September 2016 as compared to contraction of 0.2 per cent posted in the previous month. 12 out of the 22 industries reg- istered positive growth for September 2016. For the April-September 2016 period, the sector’s output con- tracted by 0.8 per cent, as against a growth of 4.2 per cent in the same period a year ago. Mining & quarrying sector continued to remain in the negative territory, al- beit its magnitude of contraction reduced sharply in the reporting month. In contrast, growth in the electricity sector accelerated to 2.4 per cent in September 2016 from an anemic 0.1 per cent in the previous month. In contrast, capital goods continue to remain a key drag on the overall IIP According to use-based classification, capital goods continue to remain a key drag on the overall IIP. Capi- tal goods witnessed the eleventh straight month of contraction in the month of September 2016. The sec- tor posted a contraction to the tune of 21.6 per cent as compared to decline of 22.1 per cent in the previous month. The continued decline in capital sector’s output has raised doubts about the recovery of investment cy- cle in the country. To be sure, industrial production ex- cluding the output of the capital goods sector stood at 4.4 per cent during the month as compared to 2.6 per cent in the previous month. Going forward, capital ex- penditure by the Government will be crucial to support recovery in this segment. Consumer goods post an impressive perfor- mance in September 2016 Encouragingly, consumer goods drove the overall im- provement in IIP, growing by 6.0 per cent in September 2016, up from 0.7 per cent in August 2016. This growth was accomplished on the back of a 14 per cent rise in consumer durables production even as consumer non- durables growth remained anemic at 0.1 per cent. While the growth in non-durables sector has been depressed Industrial output moved to the positive territory in Sep- tember 2016 after two consecutive months of contrac- tion. Industrial production posted a growth of 0.7 per cent as compared to decline of an equivalent amount in the last month. Manufacturing and consumer good sectors witnessed an improvement during the month, thus contributing to the uptick in the headline data print. However, capital goods continued to weigh on the overall industrial growth. On a cumulative basis, fac- tory output in April-September 2016 contracted by 0.1 per cent compared to 4.0 per cent growth in the same period a year-ago. Overall in FY17, we expect industrial production to grow at a higher rate as compared to the previous fiscal on the back of policy aided domestic up- turn and low global commodity prices. Industrial Output Moves to Positive Territory in September 2016
  26. 26. ECONOMY MATTERS 28 DOMESTIC TRENDS Core sector output improves for the second consecutive month in October 2016 The output of eight core infrastructure industries fur- ther improved to 6.6 per cent in October 2016 on year- on-year basis as compared to 5.0 per cent in September 2016, thanks to a sharp rise in refinery production and a pick-up in cement production. The cumulative output improved to 4.9 per cent in April-October 2016 over the corresponding period of last year. The index measures output in eight infrastructure sectors – steel, cement, coal, refinery products, natural gas, crude oil, fertilisers and electricity generation. It has a 38 per cent weight in the Index of Industrial Production (IIP). Cement output quickened to 6.2 per cent in October 2016 compared with a 5.5 per cent rise in September 2016. Refinery products output quickened sharply to 15.1 per cent in October 2016 as compared to 9.3 per cent in the previ- ous month. The same three sectors continued to con- tract in October 2016 as in August and September 2016 - coal, crude oil and natural gas. for bulk of the year, better monsoon this year should aid the recovery. The boost in consumption due to the implementation of 7th Pay Commission report is ex- pected to further improve the growth of consumer du- rable sector further, going forward. Government’s recent move to demonetise notes of denomination Rs 500 and Rs 1000 will hit those indus- tries which are highly dependent on cash transactions. Industries such as construction, real estate, hotel busi- nesses, self-owned businesses, bullion and jewellery, mining etc. are likely face significant headwinds as a re- sult of this move. Consequently, growth is likely to see a sharp drop in the near term. However, in the long term, economic activity will see gradual recovery amid more inclusive growth, increased clampdown on black mon- ey, increased efficiency (by increased tax compliance) and boost to the formal economy.
  27. 27. 29 DOMESTIC TRENDS NOVEMBER 2016 Outlook The pick-up in industrial output in September 2016 after two consecutive months of contraction is an encourag- ing sign. Going forward, normal monsoons, which should improve rural demand, along with the lagged impact of interest rate reductions and 7th pay commission handouts are expected to cushion demand in future and boost industrial activity. There may be short-term disruptions on account of government’s recent demonetisation move as it impacts the cash based transactions, which are a large part of the Indian economy. However, in the medium- term the impact of this demonetisation will be largely positive for economic growth. Inflationary Pressures Abating Slowly Wholesale Price Index (WPI) based inflation moderat- ed to 3.4 per cent in October 2016 as compared to 3.6 per cent in the previous month as food articles, led by vegetables, witnessed softening of prices. This was the second consecutive month of deceleration witnessed in the WPI data print. CPI inflation too slowed down further to 4.2 per cent in October 2016, a one year low from 4.3 per cent in September 2016. This deceleration too was driven by a drop in food inflation especially in vegetables, fruits and pulses. Food and beverages infla- tion dropped to 4.1 per cent in October 2016 as prices for vegetables saw deflation to the tune of -5.7 per cent. Pulses inflation too fell to single digit figures for the first time in 21 months at 4 per cent from 14.3 per cent posted in the previous month. Government measures to address structural issues in pulses have led to relief in this segment. Normal monsoon this year has also aid- ed in the deceleration of food inflation. However, high inflation was seen in sugar which could be a cause for concern in the future. Going forward, as expected, the positive impact of a favourable monsoon this year will get further entrenched and result in further lowering of food prices. Further, the recent demonetisation meas- ure is likely to curb demand and put downward pres- sures on inflation in the short-run. This will give the RBI the necessary leg-room to cut interest rates further in order to spur demand. Food articles inflation pulls down inflation in primary articles Amongst the WPI sub-categories, inflation in primary articles slowed down sharply to 3.3 per cent in October 2016 as compared to 4.8 per cent posted in Septem- ber 2016. Within primary articles, inflation in both food and non-food sub categories moderated during the reporting month. Primary food inflation moderated to 4.3 per cent (as compared to 5.7 per cent in Septem- ber 2016) while non-food inflation stood at 1.1 per cent (as compared to 4.5 per cent in September 2016). How- ever, within the WPI food segment, there were a few segments which saw high inflation during the report-
  28. 28. ECONOMY MATTERS 30 DOMESTIC TRENDS Outlook Both WPI and CPI inflation moderated in October 2016, providing relief to the policymakers. It also validated the Reserve Bank of India’s decision to frontload an interest rate cut in anticipation of such a development. Going forward, CII expects CPI inflation to settle within the RBI’s target of 5 per cent for March 2017 as food prices are expected to ease going forward on account of a spate of reforms undertaken by the present government to ad- dress the supply bottlenecks and the expectation that monsoon would be normal after two consecutive years of drought. This should spur RBI to continue its rate easing cycle as investments continue to be sluggish. ing month. Potato, a daily consumable vegetable, wit- nessed maximum inflationary pressure at 60.6 per cent, while inflation in fruits rose by 6.5 per cent during the month. Fuel inflation accelerates on the back of in- crease in the domestic fuel prices by the gov- ernment Inflation in the fuel group of WPI accelerated to 6.2 per cent in October 2016 from 5.6 per cent in the previ- ous month on the back of increase in the domestic fuel prices by the government. Inflation in petrol and die- sel group quickened to 3.6 per cent (from 1.3 per cent in September 2016) and 19.3 per cent (19.1 per cent in September 2016) respectively in October 2016. Going forward, with the Organization of the Petroleum Ex- porting Countries (OPEC) announcing an agreement in September 2016 to cut back on output in an attempt to lift global prices back up, we can expect some upward pressure on global crude oil prices. This in turn will push up domestic fuel inflation as well. Non-food manufacturing inflation slowly inching up as demand slowly returns Inflation in manufactured group increased marginal- ly to 2.7 per cent in October 2016 as compared to 2.5 per cent posted in the previous month. Manufacturing food inflation which had moved to double-digits in July 2016 moderated further to 10.5 per cent in the report- ing month. Meanwhile, manufacturing non-food infla- tion (popularly called as core inflation and a proxy for demand-side pressures in the economy) accelerated to 1.0 per cent from 0.6 per cent in September 2016. With core inflation recording an increase after a prolonged period of deflation, there are indications that demand is returning to the economy.
  29. 29. 31 DOMESTIC TRENDS NOVEMBER 2016 Merchandise trade deficit widens sharply in October 2016 Owing to positive growth posted by imports during the month, the merchandise trade deficit widened sharply to US$10.2 billion in October 2016 from US$7.7 billion in the previous month. Cumulatively, during April-October 2016, India’s trade deficit stood at US$53.2 billion, a whopping 32.0 per cent lower than the year-ago period. Going forward, while improving domestic competitive- ness through structural reforms is crucial to improve exports performance; we believe that this can only ma- terialize in the medium-term. In the near-term, a weaker rupee can act as a catalyst to revive competitiveness. Exports Growth Rebounds in October 2016 Signaling a reversal of the prolonged contraction in mer- chandise exports for a very long time, growth in exports rebounded to 9.6 per cent in October 2016 from 4.6 per cent growth recorded in the previous month, on the back of a good showing by the jewellery and engineer- ing sectors. However, cumulatively for the April-Octo- ber 2016 period, exports were down 0.17 per cent stand- ing at US$154.9 billion, as against exports of US$155.2 billion over the same period last year. Gems & jewellery exports rose 21.8 per cent to US$4.38 billion in October 2016 from US$3.59 billion in October 2015, while engi- neering goods saw 13.8 per cent jump to US$5.26 billion in comparison to US$4.6 billion in the corresponding pe- riod last year. The trend was fairly consistent, with 18 of the 30 categories recording growth on a year-on-year (y-o-y) basis. Merchandise imports posts growth after a gap of 22 months in October 2016 Merchandise imports posted growth in October 2016 after a gap of 22 months. Imports grew by 8.1 per cent to US$33.6 billion in October 2016 as compared to con- traction of 2.5 per cent in the previous month. With global oil prices climbing back to near US$50 a barrel mark, oil imports during October 2016 were valued at US$7.14 billion, which was 3.98 per cent higher than oil imports valued at US$6.87 billion in the corresponding period last year. Non-oil imports in October 2016 rose by 9.3 per cent to US$26.53 billion, from US$24.28 billion in the same month of last year. During April-October FY17, merchandise imports on a cumulative basis stood at US$208.0 billion, registering a degrowth of 10.9 per cent on a year-on-year basis.
  30. 30. ECONOMY MATTERS 32 POLICY FOCUS 1. Demonetization gives body blow to black economy In a historical move that will add record strength in the fight against corruption, black money, money launder- ing, terrorism and financing of terrorists as well as coun- terfeit notes, the Government of India has decided that the Rs 500 and Rs 1000 notes will no longer be legal tender from midnight, 8th November 2016. The Govern- ment has accepted the recommendations of the RBI to issue Rs 2000 notes and new notes of Rs 500 will also be placed in circulation. Prime Minister Shri Narendra Modi made these important announcements during a televised address to the nation on the evening of Tues- day 8th November 2016. Currency in the form of Rs 1000 and Rs 500 notes amounted to Rs 14.2 lakh crore as of March 2016, or about 85 per cent of total currency in circulation. If this is converted to current and savings deposits, there will be an increase in banks’ liquidity. Describing illegal financial activities as the “biggest blot”, PM Modi said that despite several steps taken by his government over the last two-and-a-half years, India’s global ranking on corruption had moved only to 76th position from 100th earlier. The World Bank in July, 2010 estimated the size of the shadow economy for India at 20.7 per cent of the GDP in 1999 and rising to 23.2 per cent in 2007. There are similar estimates made by other Indian and international agencies. A parallel shadow economy corrodes and eats into the vitals of the country’s economy. It generates inflation which adversely affects the poor and the middle classes more than others. It deprives Government of its legiti- mate revenues which could have been otherwise used for welfare and development activities. Thus, the de- monetization of high denomination notes is ultimately a strong message that goes out to all those who used cash for illicit activities. A big blow has been dealt to those who engaged in corruption and took cash bribes. The message will have far-reaching implications for those who indulge in such illicit activities. This would greatly curb such transactions and will be a body blow to corruption, racketeering, human trafficking, gam- bling, and other such activities which vitiate the entire security system of the country. The important policy announcements by the Government in the month of October-November 2016 are covered in this month’s Policy Focus. Our endeavor through this section is to keep our readers abreast of the latest happenings on the policy front so that they can take an informed decision accordingly.
  31. 31. 33 POLICY FOCUS NOVEMBER 2016 Highlighting the key features of the measures an- nounced, PM Modi added that these decisions of the government will fully protect the interests of honest and hard-working citizens of India and that those Rs 500 and Rs 1000 notes hoarded by anti-national and anti-social elements will become worthless pieces of pa- per. He further added that the steps taken by the Gov- ernment would strengthen the hands of the common citizens in the fight against corruption, black money and counterfeit notes. PM Modi highlighted that the people holding old notes of Rs 500 or Rs 1000 could deposit these notes in bank or post offices from 10th November onwards till 30th December. However, there will be some limits placed on the withdrawals from ATMs and bank for the very short run. Further, he emphasized that there will be no restriction on any kind of non-cash payments by cheques, demand drafts, debit or credit cards and elec- tronic funds transfer. CII’s reaction on government’s demon- etization drive “Prime Minister Modi’s epochal move to stamp out black money once and for all means a definitive and impactful end to the parallel economy and wider use of cashless transactions. The Prime Minister’s address to the nation clearly mentions his vision and objectives for introducing the unusual and in- novative move of making Rs 500 and Rs 1000 notes not legal tender any more. It sends out the strong message that corruption and underground transac- tions will no longer be tolerated. Prime Minister’s resolute action infuses huge confidence among honest tax payers, legal industry and the public at large that India means business when it comes to halting corruption and black money,” said Dr Nau- shad Forbes, President, Confederation of Indian In- dustry. He was responding to the bold measure to demonetize Rs 500 and Rs 1000 notes announced during an address to the nation by Hon’ble Prime Minister Shri Narendra Modi. “Prime Minister Modi has taken a massive and strong measure that will have far-reaching positive implications for the economy. We congratulate the Prime Minister for his very courageous action that broadcasts the powerful signal regarding curtail- ment of the cash economy. It truly proves to citi- zens and the world that India can take strong eco- nomic measures when required, and underscores the will of the Government to undertake big bang reforms. We are confident that Prime Minister Modi will continue to take up difficult moves with huge macro impact on the economy in the future,” said Mr Chandrajit Banerjee, Director General, CII. The impact of the decision to make Rs 500 and Rs 1000 no longer legal tender will be felt in addressing the issues of terrorism, counterfeit currency, and arms smuggling, as mentioned by Hon’ble Prime Minister. It would have economy-wide positive ad- vantages in tackling the scourge of corruption that has taken hold in the country over the last several decades. Such an initiative was recommended by CII several times in the past. CII has always supported measures to root out cor- ruption and black money. CII’s code of conduct for ethical business prohibits bribery and money laun- dering and promotes ethical business dealings and compliance with laws on terrorist financing. In its submissions to the Government, it has suggested measures to address electoral spending tackle black money and undertake steps to promote cash- less transactions. 2. The Central Government takes various decisions for the benefit of farmers in the current Rabi Season and to promote digital payments in the economy Following the cancellation of legal tender character of old Rs. 500 and Rs.1000 notes, a number of measures have been announced by the Union Government, taking into consideration the requirements of various sections of society. Special measures like higher cash drawal limits for farmers and registered traders in APMC mar- kets/Mandis, extension of time limit for payment of crop insurance premium, purchase of seeds with old high denomination bank notes of Rs. 500 from certain select Government Centres etc., have already been an- nounced for the benefit of the farmers. Steps have been
  32. 32. ECONOMY MATTERS 34 POLICY FOCUS taken to ensure availability of cash in rural branches of Banks and 1.55 lakh Post Offices. Network of Banking Correspondents has also been activated with higher cash holding limits to meet the requirements of people in the rural areas. On further review of the matter, the Government has taken certain decisions for the benefit of farmers in the current Rabi season and to promote digital payments in the economy. These are in the nature of operational measures and are as follows: - NABARD has made available Rs 21,000 crores limit to the District Central Cooperative Banks (DCCBs) through State Cooperative Banks for Rabi agricul- tural operations. This will enable the DCCBs to sanc- tion and disburse crop loans to the farmers through the network of Primary Agricultural Cooperative Societies (PACS). This will benefit more than 40 per cent of the small and marginal farmers who avail in- stitutional credit/crop loans. - RBI and the Banks have been advised to make the required cash available to the DCCBs. This will en- sure quick and unhindered flow of credit and re- quired cash to the farmers, especially for sowing and other agricultural operations during the cur- rent Rabi season. - As a relief to small borrowers (i.e., loans upto Rs 1 crore), RBI has already decided to provide addi- tional 60 days time for repayment of dues. This will be applicable to personal and crop loans including housing and agricultural loans, taken from banks, NBFCs, DCCBs, PACS or NBFC- MFIs. - There are 30 crore RuPay Debit Cards which have been issued, including those issued to Jan Dhan Account holders. To facilitate the use of this debit card, the Banks have decided to waive transaction charges (MDR) up to 31st December, 2016. - To promote greater use of Debit Cards, Public Sec- torBanksandsomeoftheprivatesectorBankshave decided to waive the MDR charges till 31.12.2016. Other private sector Banks are expected to do like- wise. - To promote greater use of Debit Cards, Public Sec- torBanksandsomeoftheprivatesectorBankshave decided to waive the MDR charges till 31.12.2016. Other private sector Banks are expected to do like- wise. - To promote greater usage of payments through e- wallets, RBI has decided to increase the monthly transaction limit for individuals from Rs 10,000 to Rs 20,000. - TRAI has decided to reduce the Unstructured Sup- plementary Service Data (USSD) charges from the current Rs 1.50 per session to Rs 0.50 per session for transactions relating to Banking and payments. They have also increased the stages from current five to eight. - All Government organizations, public sector un- dertakings and other Government authorities have been advised to use only digital payment methods such as internet banking, unified payment inter- face, cards, Aadhar enabled payment system etc. to make payments to all stakeholders and employees. 3. RBI allows banks to issue masala bonds The Reserve Bank of India (RBI) on November 3rd, 2016 after consultation with the government, has allowed In- dian banks to raise funds through issuance of rupee-de- nominated bonds overseas (also called masala bonds) within the present limit of Rs 2,44,323 crore set for foreign investment in corporate bonds. According to the RBI, a robust macroeconomic scenario in India and a relatively stable currency view could attract investors to rupee bonds issued overseas by Indian firms. Foreign investors already involved in the Indian domestic cur- rency space could also be interested in the overseas rupee product. To strengthen their capital base, banks could raise per- petual debt instruments, which could be considered for calculating a bank’s additional tier-1 capital, or debt cap- ital instrument that can go into calculating a bank’s tier- 2 capital. These bonds will be issued according to the Basel-III norms and therefore, will have loss absorption clause. Under this clause, a bank could choose not to honour the coupon payment in case of financial stress. For financing infrastructure and affordable housing, the banks could issue long-term bonds, which don’t have the loss absorption clause.
  33. 33. 35 POLICY FOCUS NOVEMBER 2016 Rupee bonds overseas offer ease of access compared to the process of direct investments in India (registration as a foreign portfolio investor (FPI) and involvement of domestic custodians and brokers and local settlement systems), the central bank said. The window for rupee- denominated bonds overseas is expected to become a meeting ground for Indian corporates seeking funds and foreign investors seeking returns. 4. Council fixes 4-level GST rate structure The GST council has decided that the Goods and Ser- vices Tax (GST) will be levied at multiple rates ranging from 0 per cent to 28 per cent. A zero tax rate will ap- ply to 50 per cent of the items present in the consumer price index basket, including food grains such as rice and wheat. The lowest slab of 5 per cent will be for items of common consumption, while there would be two standard rates of 12 per cent and 18 per cent, which would fall on the bulk of the goods and services. This includes fast-moving consumer goods. Demerit goods such as tobacco, aerated drinks, pan masala, and lux- ury car will be taxed at 28 per cent with an additional Cess. This Cess along with Clean Energy Cess would be used to compensate States for loss of revenue during the first 5 years of GST implementation. The GST Coun- cil will review annually the tax revenue raised from the cess that will fund compensations from the Centre to States for losses arising out of the transition to the GST. 5. Draft Model GST Law, Draft IGST Law and Draft Compensation Law Placed in the Public Domain The Draft Model GST Law (MGL), Draft IGST Law and Draft Compensation Law which would be considered by the GST Council for approval has been placed in the public domain for information of trade, industry and other stake holders. The first draft of the MGL had been released by the Ministry of Finance (MoF) on 14th June 2016 for seeking recommendations from industry, trade bodies and other stakeholders. Goods and Services Tax (Compensation to the States for loss of revenue) law has been put in public domain alongwith the draft Central Goods and Services Tax (CGST) law / State Goods and Services Tax (SGST) law [forming part of MGL] and Integrated Goods and Ser- vices Tax (IGST) law. There are significant changes in the revised draft laws with respect to the definitions, levy of tax, Input Tax Credit, time and place of supply etc. GST rules, Valua- tion rules, exemption list and the classification of goods and services are yet to be notified. The revised and im- proved version of this Model GST laws shall now be con- sidered by the GST Council for approval on 2nd and 3rd of December, 2016. 6. Revised Double Taxation Avoidance and the Prevention of Fiscal Evasion (DTAA) Agreement signed between India and Cy- prus Nearly three months after Cabinet approved signing of revised Double Taxation and the Prevention of Fis- cal evasion (DTAA) with Cyprus, India has now signed a new double tax avoidance pact with this Island nation, which is a popular tax haven. This agreement will re- place the existing DTAA that was signed by two coun- tries on 13th June 1994. The Protocol was signed by Mr. Ravi Bangar, High Commissioner of India to Cyprus on behalf of India and Mr. Harris Georgiades, the Minister of Finance on behalf of Cyprus. New DTAA provides for source based taxation of capi- tal gains arising from alienation of shares, instead of residence based taxation provided under the existing DTAA. However, a grandfathering clause has been pro- vided for investments made prior to 1st April, 2017, in re- spect of which capital gains would continue to be taxed in the country of which taxpayer is a resident. The new Agreement provides for assistance between the two countries for collection of taxes. The new Agreement also updates the provisions related to exchange of information to accepted international standards, which will enable exchange of banking in- formation and allow the use of such information for purposes other than taxation with the prior approval of the competent authorities of the country providing the information. The new Agreement expands the scope of ‘permanent establishment’ and reduces the tax rate on royalty in the country from which payments are made to 10 per cent from the existing rate of 15 per cent, in
  34. 34. ECONOMY MATTERS 36 POLICY FOCUS line with the tax rate under Indian tax laws. It also up- dates the text of other provisions in accordance with the international standards and consistent policy of In- dia in respect of tax treaties. Provisions of new DTAA will enter into force after the completion of necessary internal procedures in both countries and is expected to come into effect in India in respect of income derived in fiscal years beginning on or after 1st April, 2017. 7. India to get Swiss Bank Accounts Data from September 2018 India will be able to access information relating to bank accounts held by Indians in Switzerland from Septem- ber 2019 onwards. As per the agreement signed by the two countries on Tuesday, data beginning September 2018 will be shared from September 2019 onwards on an automatic basis, a finance ministry statement said. The ‘Joint Declaration’ for implementation of Automat- ic Exchange of Information (AEOI) signed on 22nd No- vember, 2016 between India and Switzerland provides that both countries will start collecting data in accord- ance with the global standards in 2018 and exchange it from 2019 onwards. While Switzerland has conformed to the global standards on automatic exchange of infor- mation with the signing of the declaration, India, on its part, has promised to safeguard the confidentiality of the data. The Joint Declaration for implementing AEOI was signed by CBDT Chairman Sushil Chandra and Depu- ty Chief of Mission of Swiss Embassy Gilles Roduit. 8. RBI Announces Measures to Manage Li- quidity Conditions With the withdrawal of the legal tender status of Rs 500 and Rs 1,000 denomination bank notes beginning November 9, 2016, there has been a surge in deposits relative to the expansion in bank credit, leading to large excess liquidity in the system. The magnitude of surplus liquidity available with the banking system is expected to increase further in the fortnights ahead. In view of this, RBI has decided to absorb a part of this surplus liquidity by applying an incremental cash reserve ratio (CRR) as a purely temporary measure, as under: a. The CRR remains unchanged at 4 per cent of out- standing net demand and time liabilities (NDTL). b On the increase in NDTL between September 16, 2016 and November 11, 2016, scheduled banks shall maintain an incremental CRR of 100 per cent, effec- tive the fortnight beginning November 26, 2016. This is intended to absorb a part of the surplus li- quidity arising from the return of the withdrawn currency to the banking system, while leaving adequate liquidity with banks to meet the credit needs of the productive sectors of the economy. As the incremental CRR is intended to be a temporary measure within the Reserve Bank’s liquidity man- agement framework to drain excess liquidity in the system, it shall be reviewed on December 9, 2016 or even earlier. c. The Reserve Bank has separately revived the Guar- antee Scheme to enable deposit of the withdrawn currency balances at the Reserve Bank and get im- mediate value. This measure should also facilitate banks’ compliance with the incremental CRR. 9. Taxation Laws (Second Amendment) Bill, 2016 Introduced in Lok Sabha Evasion of taxes deprives the nation of critical resources which could enable the Government to undertake anti- poverty and development programmes. It also puts a disproportionate burden on the honest taxpayers who have to bear the brunt of higher taxes to make up for the revenue leakage. As a step forward to curb black money, bank notes of existing series of denomination of the value of Rs.500 and Rs.1000 had been recently withdrawn the Reserve Bank of India. Concerns have been raised that some of the existing provisions of the Income-tax Act, 1961 (the Act) could possibly be used for concealing black money. The Taxa- tion Laws (Second Amendment) Bill, 2016 (‘the Bill’) has been introduced in the Parliament to amend the provi- sions of the Act to ensure that defaulting assessees are subjected to tax at a higher rate and stringent penalty provision. Further, in the wake of declaring specified bank notes

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