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Focus of the Month: Rising NPAs of Banking Sector

Confederation of Indian Industry
Confederation of Indian Industry
Confederation of Indian IndustryDeputy Director General at Confederation of Indian Industry

The unabated rise in Non-Performing Assets (NPAs) of the Indian banking sector is a cause for concern for the economy. Due to this reason, the Economic Survey de- voted considerable attention to what it terms India’s Twin Balance Sheet problem - overleveraged and dis- tressed companies and the rising NPAs in Public Sector Bank balance sheets. The issue is important because it is holding up private investment in the country and there- fore, growth across all sectors. Some of the major rea- sons for increase in NPAs of banks are the subdued do- mestic demand conditions and no signs of a turnaround in private investment along with continuing uncertainty in the global markets leading to lower exports of various products like textiles, engineering goods, leather, gems, etc.

Focus of the Month: Rising NPAs of Banking Sector

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Focus of the Month: Rising NPAs of  Banking Sector
2ECONOMY MATTERS
1
FOREWORD
APRIL 2017
T
he recent ordinance to amend the Banking Regulation Act will empower the RBI to solve the
problem of Non-Performing Assets (NPAs) in the Indian banking sector, which has become a
major cause of worry for the policymakers. The main underlying reasons for the increase in NPAs
of banks are the adverse conditions in sectors such as infrastructure and metals. The RBI will now be in
a position to advise banks on the resolution of bad assets including initiationof insolvency proceedings.
It is pivotal to stem the growth of the rising NPAs as it is holding up private investment in the country
and therefore, growth in many sectors. This is a much-needed step that will help revive stranded assets
and resume credit flow to industry.
The contraction in industrial production coupled with increased volatility in the data print in the month
of February 2017 is worrisome. It is hoped that the adoption of the new IIP series with the base 2011-12,
would display lower volatility and be a better reflection of contemporary market realities. CPI inflation
meanwhile, edged higher in March 2017, albeit remaining within the RBI’s prescribed range. However,
with the outlook for international crude prices having eased recently and the supply-side measures
taken by the government, inflationary pressures are expected to remain stable, going forward. Addi-
tionally, the prospect of normal monsoon this year will also lead to a moderation in food inflation, going
forward. In view of this, we would request the RBI to shift its policy stance from neutral to accommoda-
tive and effect a cut in interest rates to renew business sentiment, support domestic demand and trig-
ger the turn of the investment cycle.
On the global front, China’s economic growth has continued to surprise on the upside following a better
than expected fourth quarter of 2016. The current economic upcycle has lasted longer than expected
thanks to government stimulus and easy monetary policy. Additionally, the surge in Chinese real estate
prices has also cushioned growth to a great extent. However, with structural issues such as high debt
levels and monetary policy shifting gears towards a neutral stand, there is likelihood of China’s growth
peaking in the near term. That said, a sharp moderation in growth is not expected given favourable
policy and growth dynamics leading up to the important power transition due in November 2017.
Chandrajit Banerjee
Director General, CII
Focus of the Month: Rising NPAs of  Banking Sector
3 APRIL 2017
EXECUTIVE SUMMARY
ECONOMY MATTERS 4
Focus of the Month: Rising NPAs of
Banking Sector
The unabated rise in Non-Performing Assets (NPAs) of
the Indian banking sector is a cause for concern for the
economy. Due to this reason, the Economic Survey de-
voted considerable attention to what it terms India’s
Twin Balance Sheet problem - overleveraged and dis-
tressed companies and the rising NPAs in Public Sector
Bank balance sheets. The issue is important because it is
holding up private investment in the country and there-
fore, growth across all sectors. Some of the major rea-
sons for increase in NPAs of banks are the subdued do-
mestic demand conditions and no signs of a turnaround
in private investment along with continuing uncertainty
in the global markets leading to lower exports of various
products like textiles, engineering goods, leather, gems,
etc. Given the severity of the issue at hand, this month’s
Focus of the Month covers the issue of rising NPAs in the
banking sector.
Domestic Trends
The contraction in industrial output in February 2017 by
1.2 per cent after a positive upturn in January 2017 as well
as the increased volatility of the IIP print is a matter for
concern. It is hoped that the adoption of the new IIP se-
ries with the base 2011-12, would display lower volatility
and be a better reflection of contemporary market re-
alities. Leaving aside the volatility issues, going forward,
the lagged impact of interest rate reductions and 7th
pay
commission handouts are expected to cushion demand
and boost industrial activity. In some encouraging news,
CII’s Business Confidence Index (CII-BCI) for January-
March 2017 quarter rose to an all-time high of 64.1 as
against 56.5 recorded in the previous quarter. On the in-
flation front, while CPI inflation accelerated to 3.81 per
cent in March 2017, it still continues to be within the RBI’s
comfort zone, which prescribes CPI to remain within the
4 per cent level with a two-percentage point-band on ei-
ther side. Moreover, the outlook for international crude
prices has eased recently and is likely to provide stabil-
ity to the inflation environment. Additionally, the pros-
pect of normal monsoon will also lead to a moderation
in food inflation, going forward. However, the RBI chose
to adopt a cautious approach to keep the policy rates un-
changed in April 2017, in order to safeguard against any
upside risk to inflation in the near future. CII is hopeful
that going forward the central bank would shift its policy
stance from neutral to accommodative and effect a cut
in interest rates to refurbish business sentiment, support
domestic demand and trigger the turn of the investment
cycle.
Policy Focus
This section covers the major policy changes announced
by government/RBI in the month of April 2017. The Union
government has approved the setting up of Rail Devel-
opment Authority (RDA), an independent regulator to
recommend passenger and freight fares and set service
level benchmarks. Setting up of RDA will help improve
the services offered to passengers, provide comfort to
investors and enhance transparency and accountability.
Meanwhile, the Central Board of Excise and Customs
(CBEC) has released three new draft rules on Accounts
and Records, Appeals and Revision and Advance Ruling
under GST and placed them for comments in the public
domain. Moreover, with the expected roll out of GST on
1st
July, 2017, the various current indirect taxes levied on
sale of goods or supply of services by the Central or State
Government will be subsumed into GST. Therefore, to
make the Customs Act & Excise Act compliant with GST,
Lok Sabha on 6th
April 2017 passed The Taxation (Amend-
ment) Bill, 2017. Further, both the houses of Parliament
have also passed The Employees Compensation (Amend-
ment) Bill, 2016 in the recently concluded Budget session
of the Parliament. The Bill ensures compensation up to Rs
1 lakh to an employee injured in an industrial accident and
imposes hefty penalty in case of any violation by the em-
ployers. The Centre has also allowed Indian companies to
merge with companies abroad, thus paving the way for a
broader Merger & Acquisition (M&A) landscape.
Global Trends
Growth in GDP in China continued its uptrend and in-
creased to 6.9 per cent in the first quarter of 2017, as
compared to a growth of 6.7 per cent in the first quar-
ter of 2016. While it had hit a trough in the early quar-
ters of 2016, it is soon returning to its previous levels. The
growth in GDP, in the first quarter of 2017, was largely led
by growth in the tertiary sector. Other variables like Pur-
chasing Managers’ Index (PMI) for China also expanded
in March 2017, auguring well for the economic prognosis
for the economy in 2017. Meanwhile, growth in the larg-
est economy, the US, slowed down in the first quarter
of 2017 on lower consumption spending. The annual GDP
growth in 2016 was also lower as compared to 2015. This
lower-than-expected growth prompted the US Federal
Reserve to maintain a status-quo on the Fed Funds rate in
its meeting held in first week of May 2017. Going forward,
the Fed will be watchful for any new developments on
the economic front and the fiscal stimulus plans of the
Trump administration.
Ad

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Focus of the Month: Rising NPAs of Banking Sector

  • 3. 1 FOREWORD APRIL 2017 T he recent ordinance to amend the Banking Regulation Act will empower the RBI to solve the problem of Non-Performing Assets (NPAs) in the Indian banking sector, which has become a major cause of worry for the policymakers. The main underlying reasons for the increase in NPAs of banks are the adverse conditions in sectors such as infrastructure and metals. The RBI will now be in a position to advise banks on the resolution of bad assets including initiationof insolvency proceedings. It is pivotal to stem the growth of the rising NPAs as it is holding up private investment in the country and therefore, growth in many sectors. This is a much-needed step that will help revive stranded assets and resume credit flow to industry. The contraction in industrial production coupled with increased volatility in the data print in the month of February 2017 is worrisome. It is hoped that the adoption of the new IIP series with the base 2011-12, would display lower volatility and be a better reflection of contemporary market realities. CPI inflation meanwhile, edged higher in March 2017, albeit remaining within the RBI’s prescribed range. However, with the outlook for international crude prices having eased recently and the supply-side measures taken by the government, inflationary pressures are expected to remain stable, going forward. Addi- tionally, the prospect of normal monsoon this year will also lead to a moderation in food inflation, going forward. In view of this, we would request the RBI to shift its policy stance from neutral to accommoda- tive and effect a cut in interest rates to renew business sentiment, support domestic demand and trig- ger the turn of the investment cycle. On the global front, China’s economic growth has continued to surprise on the upside following a better than expected fourth quarter of 2016. The current economic upcycle has lasted longer than expected thanks to government stimulus and easy monetary policy. Additionally, the surge in Chinese real estate prices has also cushioned growth to a great extent. However, with structural issues such as high debt levels and monetary policy shifting gears towards a neutral stand, there is likelihood of China’s growth peaking in the near term. That said, a sharp moderation in growth is not expected given favourable policy and growth dynamics leading up to the important power transition due in November 2017. Chandrajit Banerjee Director General, CII
  • 6. EXECUTIVE SUMMARY ECONOMY MATTERS 4 Focus of the Month: Rising NPAs of Banking Sector The unabated rise in Non-Performing Assets (NPAs) of the Indian banking sector is a cause for concern for the economy. Due to this reason, the Economic Survey de- voted considerable attention to what it terms India’s Twin Balance Sheet problem - overleveraged and dis- tressed companies and the rising NPAs in Public Sector Bank balance sheets. The issue is important because it is holding up private investment in the country and there- fore, growth across all sectors. Some of the major rea- sons for increase in NPAs of banks are the subdued do- mestic demand conditions and no signs of a turnaround in private investment along with continuing uncertainty in the global markets leading to lower exports of various products like textiles, engineering goods, leather, gems, etc. Given the severity of the issue at hand, this month’s Focus of the Month covers the issue of rising NPAs in the banking sector. Domestic Trends The contraction in industrial output in February 2017 by 1.2 per cent after a positive upturn in January 2017 as well as the increased volatility of the IIP print is a matter for concern. It is hoped that the adoption of the new IIP se- ries with the base 2011-12, would display lower volatility and be a better reflection of contemporary market re- alities. Leaving aside the volatility issues, going forward, the lagged impact of interest rate reductions and 7th pay commission handouts are expected to cushion demand and boost industrial activity. In some encouraging news, CII’s Business Confidence Index (CII-BCI) for January- March 2017 quarter rose to an all-time high of 64.1 as against 56.5 recorded in the previous quarter. On the in- flation front, while CPI inflation accelerated to 3.81 per cent in March 2017, it still continues to be within the RBI’s comfort zone, which prescribes CPI to remain within the 4 per cent level with a two-percentage point-band on ei- ther side. Moreover, the outlook for international crude prices has eased recently and is likely to provide stabil- ity to the inflation environment. Additionally, the pros- pect of normal monsoon will also lead to a moderation in food inflation, going forward. However, the RBI chose to adopt a cautious approach to keep the policy rates un- changed in April 2017, in order to safeguard against any upside risk to inflation in the near future. CII is hopeful that going forward the central bank would shift its policy stance from neutral to accommodative and effect a cut in interest rates to refurbish business sentiment, support domestic demand and trigger the turn of the investment cycle. Policy Focus This section covers the major policy changes announced by government/RBI in the month of April 2017. The Union government has approved the setting up of Rail Devel- opment Authority (RDA), an independent regulator to recommend passenger and freight fares and set service level benchmarks. Setting up of RDA will help improve the services offered to passengers, provide comfort to investors and enhance transparency and accountability. Meanwhile, the Central Board of Excise and Customs (CBEC) has released three new draft rules on Accounts and Records, Appeals and Revision and Advance Ruling under GST and placed them for comments in the public domain. Moreover, with the expected roll out of GST on 1st July, 2017, the various current indirect taxes levied on sale of goods or supply of services by the Central or State Government will be subsumed into GST. Therefore, to make the Customs Act & Excise Act compliant with GST, Lok Sabha on 6th April 2017 passed The Taxation (Amend- ment) Bill, 2017. Further, both the houses of Parliament have also passed The Employees Compensation (Amend- ment) Bill, 2016 in the recently concluded Budget session of the Parliament. The Bill ensures compensation up to Rs 1 lakh to an employee injured in an industrial accident and imposes hefty penalty in case of any violation by the em- ployers. The Centre has also allowed Indian companies to merge with companies abroad, thus paving the way for a broader Merger & Acquisition (M&A) landscape. Global Trends Growth in GDP in China continued its uptrend and in- creased to 6.9 per cent in the first quarter of 2017, as compared to a growth of 6.7 per cent in the first quar- ter of 2016. While it had hit a trough in the early quar- ters of 2016, it is soon returning to its previous levels. The growth in GDP, in the first quarter of 2017, was largely led by growth in the tertiary sector. Other variables like Pur- chasing Managers’ Index (PMI) for China also expanded in March 2017, auguring well for the economic prognosis for the economy in 2017. Meanwhile, growth in the larg- est economy, the US, slowed down in the first quarter of 2017 on lower consumption spending. The annual GDP growth in 2016 was also lower as compared to 2015. This lower-than-expected growth prompted the US Federal Reserve to maintain a status-quo on the Fed Funds rate in its meeting held in first week of May 2017. Going forward, the Fed will be watchful for any new developments on the economic front and the fiscal stimulus plans of the Trump administration.
  • 7. 5 FOCUS OF THE MONTH Rising NPAs of Banking Sector APRIL 2017 leading to lower exports of various products like tex- tiles, engineering goods, leather, gems, etc. Moreover, the Public Sector Banks (PSBs) continue to be under stress on account of aggressive lending in the past. To be sure, the bad loan crisis at Indian state-owned banks continues to worsen, with banks posting a 56.4 per cent rise in gross non-performing assets or NPAs in 2016 as per a report by The Indian Express (dated 20th Febru- ary, 2017 citing figures compiled by Care Ratings). The recent ordinance to amend the Banking Regulation Act will give the RBI more power to resolve the problem of NPAs in the Indian banking sector, which has become a major cause of worry for the policymakers. The RBI will now be in a position to advise banks on the resolu- tion of bad assets including initiation of insolvency pro- ceedings. This is a much-needed step that will help re- vive stranded assets and resume credit flow to industry. T he unabated rise in Non-Performing Assets (NPAs) of the Indian banking sector is a cause for concern for the economy. Due to this reason, the Economic Survey devoted considerable attention to what it terms India’s Twin Balance Sheet problem - overleveraged and distressed companies and the rising NPAs in Public Sector Bank balance sheets. The issue is important because it is holding up private investment in the country and therefore, growth across different sectors. Some of the major reasons for the increase in NPAs of banks are the subdued domestic demand conditions and no signs of a turnaround in private investment along with continuing uncertainty in the global markets
  • 8. 6 FOCUS OF THE MONTH ECONOMY MATTERS RBI Gets More Powers to Tackle NPAs T he Banking Regulation (Amendment) Ordinance, 2017, which was promulgated on 5th May 2017, in- troduces two new Sections (viz. 35AA and 35AB) after Section 35A in the Banking Regulation Act, 1949. The first section enables the Union Government to au- thorise the Reserve Bank of India (RBI) to issue direc- tions to any bank to initiate an insolvency resolution process against the borrower who has defaulted on payments. The second section gives the apex bank the right to form oversight committees comprising mem- bers handpicked by the regulator to “advise banking companies on resolution of stressed assets”. The burgeoning NPA problem of the banks had been putting pressure on the balance sheet of the banks and has also restricted their capacity to lend for the devel- opment of the Indian economy. The passage of the Or- dinance Bill to amend the Banking Regulation Act by the Hon’ble President of India has given more teeth to the RBI to help banks in tackling the NPAs. Considering the prevailing NPAs situation and the problem in recovery of loans, the amendment will empower RBI to assist banks in recovering the unrecoverable loans by allow- ing sell-off of the collaterals to PSUs in the same sector. Against the earlier provision of issuing general direc- tions to banks, the RBI can now issue borrower-specific instructions to banks to initiate the resolution under the provisions of the Insolvency and Bankruptcy Code 2016. The government, on its part, has enabled the RBI to is- sue such directions. The promulgation of the ordinance by the Union Gov- ernment will have a direct impact on the effective reso- lution of stressed assets, particularly in consortium or multiple banking arrangements, as the RBI will be em- powered to intervene in specific cases of resolution of non-performing assets, to bring them to a definite con- clusion. This is a much-needed step that will help revive stranded assets and resume credit flow to industry. Moreover, the move is expected to speed up the NPAs resolution process, as the bankruptcy code provides for a time-bound winding up of companies and recovery of secured loans. The ordinance, which was approved by President Pranab Mukherjee, also empowers the central bank to issue other directions for resolution, and appoint or ap- prove for appointment, authorities or committees to
  • 9. 7 FOCUS OF THE MONTH APRIL 2017 advise banking companies for stressed asset resolution. Changes have also been built into the ordinance to en- sure that bankers who opt for resolution of bad debts and take haircuts on loan values are protected from any regulatory backlash. The move of the union government to promulgate the ordinance comes after clarion calls from lenders who have been facing rising NPAs despite the government taking a series of measures in the recent months. Sched- uled commercial banks’ total stressed assets, which comprise gross NPAs as well as restructured standard advances, stood at Rs 9.64 lakh crore as on December 31, 2016, as per finance ministry data. Bad debts have risen sharply in state-owned banks while private banks have registered a relatively lower spike in NPAs in the fiscal year. Accordingly, the ordinance states that it is being enacted as stressed assets in the banking system have reached “unacceptably high levels”, and there- fore, urgent measures were required for their resolu- tion. Meanwhile, the government remains committed to the speedy resolution of the problem of stressed assets in the banking system as it is holding up private invest- ment in the country and therefore, growth in many sec- tor. Apart from this ordinance, several other steps have been taken by the government to solve this problem. For example, the recent enactment of Insolvency and Bankruptcy Code (IBC), 2016 has opened up new pos- sibilities for time bound resolution of stressed assets. The Securitisation and Reconstruction of Financial As- sets and Enforcement of Security Interest (SARFAESI) Act and Debt Recovery Acts have also been amended to facilitate recoveries. A comprehensive approach is being adopted by the government for effective imple- mentation of various schemes for timely resolution of stressed assets.
  • 10. 8 FOCUS OF THE MONTH ECONOMY MATTERS The Corporate Stress Facet of India’s Twin Balance Sheet Problem I ndia’seconomicgrowthremainsresilient,withofficial projections of FY17 Gross Value Added (GVA) growth at 6.9 per cent, and RBI forecasting an uptick in FY18 growth to 7.4 per cent. The pressing issue now is to sus- tainably accelerate India’s growth up to 8 per cent and above. The only way to do so is to reinforce consump- tion growth (which has been growing at a steady 5 – 6 per cent) with renewed investment. And a dominant reason that investment growth has been languishing is due to what the 2016-17 Economic Survey labels as the “Festering Twin Balance Sheet Problem” – “over-lev- eraged companies and bad-loan-encumbered banks”. Understanding the nature of stress, and thereby rem- edying both the demand and supply impediments of credit off-take, will be key to reviving investment. While India has a significant external commercial debt (about US$181 billion), the bulk of the debt is owed to Indian banks (although incrementally, a significant part of this debt for the best credit rated companies has been raised through corporate bonds). Ergo, to mate- rially address the “bad-loan” problem of banks (and consequently revive risk appetite for renewed project investment and supply of credit), deleveraging of cor- porate balance sheets is a necessary condition. This ar- ticle looks at one of the causes for a drop in demand for credit: the rapid rise in corporate debt over the past five years to get a sense of the underlying stress. A measure of the sustainability (and extent of excess) leverage is the total Debt to Equity (D/E) ratio. The total D/E ratio of 76 (non-financial) companies in the NSE 100 Index rose from 0.8 in FY12 to 1.0 in FY15. The encour- aging part is that there is already an improvement vis- ible in 2016, which is likely to have accelerated in FY17. However, the stress of “excess” leverage can only be meaningfully understood in relation to cash flows to service the accumulated debt. An indicative metric of corporate health is the “Interest Cover Ratio” (IC Ra- tio). Whatever the debt level, if a company has the cash flow strength to pay interest and principal, it remains creditworthy. The IC ratio is essentially the Earnings Before Interest and Tax (EBIT) of a company to its in- terest liability (with EBIT measured as x times interest). The stress in IC Ratio is also evident while comparing the current situation (the past five years ending FY16) with the five high growth years, i.e. from 2004 till 2008. The left panel in Chart 1 below shows that rising growth and corporate profitability during the period FY2004 to FY08 hadpositivelyimpactedthecorporateICwhichhasgone up from 8x in FY04 to over 13x in FY07, before dipping sharply to 9x in FY08 (precursor to the financial crisis). In the four years after that, it would be difficult to make an assessment of trend in corporate IC, as the situation was most likely distorted by various stimulus measures. Picking up the thread again in FY12 (the right panel), IC was already much lower (6x in FY2012) and has stead- ily deteriorated thereafter to half of that level by FY16.
  • 11. 9 FOCUS OF THE MONTH APRIL 2017 Chart 2 (left panel) show the distribution of this stress across companies. Of a sample of 792 companies report- ing results in FY16, 101 companies had negative equity, which barring exceptions, have cceased to be the go- ing concern. Another 170 companies had IC less than 1 in FY16, and consequently were likely to be very stressed in meeting interest payment obligations. The rest 520 companies were better, with 353 of these having strong cash flows with IC greater than 2. Note that the distribution of companies with the above IC classifications had improved a bit in FY16, after a steady deterioration since FY11, but the change was at the extremities. The number of companies with strong cash flows (IC > 2) increased from 312 in FY15 to 353 in FY16, but the movement in the other buckets actu- ally deteriorated. The number of companies in the IC > 1 bucket (i.e., those with tolerable cash flows) went down, with most of these companies improving their performance and moving to the IC > 2 bucket and some even moving up 2 slots (i.e., improving) from the IC < 1 stressed bucket as well to IC > 2. At the other end, how- ever, there was a deterioration with about 20 of the stressed companies transitioning to the negative equity group. At the same time, the right panel of Chart 2 shows that the better cash flow companies have also increased their debt holdings in FY16, which is a positive develop- ment. On the flip side, the debt holdings of the stressed group (IC < 1) had also risen, and this is contrary to the reduction in the number of companies in this group, as noted before. One hypothesis for this apparent para- dox – of rising debt in stressed companies – might be additional funds to maintain debt servicing ability. This corporate debt servicing difficulty is reflected in stressed assets of banks, with a steep rise in Gross Non Performing Assets (GNPA) in the third quarter of FY16. Of course, it is difficult to disentangle this sharp rise of the effects of cash flow deterioration from the improv- ing recognition of NPAs post RBI’s Asset Quality Review (AQR), but both would have contributed. Reiterating the point made earlier, addressing both ledgers of the Twin Balance Sheet problem is critical for reviving private sector capex spends. A combination of asset sell-offs by leveraged firms, improving cash flows of minerals based companies and RBI and Government steps to speed up resolution of stressed assets is gradu- ally beginning to show results. A normal monsoon will help to sustainably boost consumption demand and gradually narrow the excess capacity overhang, at which point investments in capacity will begin to accel- erate. Chart 1
  • 12. 10 FOCUS OF THE MONTH ECONOMY MATTERS (Views are personal. Article based on research by Abhay More)
  • 14. 12 DOMESTIC TRENDS Industrial Output Hit by Volatility ECONOMY MATTERS D isplaying volatility, industrial output contracted by 1.2 per cent in February 2017 as compared to 3.3 per cent (revised upwards from 2.7 per cent) growth in the previous month. On a cumulative basis, IIP series grew by a meager 0.4 per cent during April- February in fiscal 2017 compared with 2.6 per cent in the same period last fiscal. The decline was on account of a contraction in the manufacturing sector – the biggest contributor to IIP with roughly 75 per cent weightage- and poor growth in the electricity sector. The IIP series will be soon shifted to the new base 2011-12 this year, which is likely to be more reliable as it will be in line with the new GDP series.
  • 15. 13 DOMESTIC TRENDS APRIL 2017 pected to be preceded by an improvement in the out- put of the capital goods sector. For the April-February FY17 period, the sector’s output contracted by 14.0 per cent, as against a decline of 1.4 per cent in the same pe- riod a year ago. Consumer non-durables post its steepest contraction in 10 months Consumer goods registered a greater decline of 5.6 per cent in February 2017 as compared to 0.5 per cent growth in the previous month. Both consumer durables and non-durables contributed to the fall, by de-growing 0.9 per cent and 8.6 per cent, respectively. Worryingly, consumer non-durables showed the steepest contrac- tion in 10 months. To be sure, this component is widely regarded as a proxy for rural consumption demand, and has posted a contraction for consecutive 8 months of the current fiscal. This suggests that consumption de- mand, which had been hit by the note ban, has still not recovered and a turnaround in this crucial component is still some time away. However, the prognosis of a nor- mal monsoon this year by IMD and support from the 7th Pay Commission awards are likely to cushion its growth going forward. one-year low of 1 per cent in February 2017. However, in March 2017, the output rose to 5.0 per cent on higher output of natural gas, electricity, crude oil, coal and steel. The cumulative output rose to 4.5 per cent in April- Manufacturing sector de-growth pulls down overall industrial production The manufacturing sector once again moved into the negative territory, registering a de-growth of 2.0 per cent in February 2017 as compared to positive growth of 2.9 per cent (revised upwards from 2.3 per cent) in the previous month. In terms of industries,15 out of 22 manufacturing industries showed positive growth dur- ing the year. For the April-February FY17 period, the sector’s output contracted by 0.3 per cent, as against a growth of 2.3 per cent in the same period a year ago. Mining sector displayed a healthy growth of 3.3 per cent, suggesting increased production activity on ac- count of an increase in commodity prices. Capital goods output once again declines As per the use-based classification, slowdown was seen across all the segments except basic goods which grew by 2.4 per cent in February 2017. Capital goods output fell by 3.4 per cent in February 2017 as compared to 10.9 per cent growth in the previous month mainly on ac- count of a low base of last year. The extreme volatility seen in the output of capital goods is a reason for worry as any meaningful upturn in the investment cycle is ex- After moderating in February, core sector output improves in March Mirroring the decline in output in overall industrial sec- tor, the growth of the eight core sectors slipped to over
  • 16. 14 DOMESTIC TRENDS ECONOMY MATTERS month to 6.8 per cent in March 2017, suggesting that the disruption in construction activities seen after the note ban is yet to be arrested. Only coal, crude oil, natu- ral gas, steel and electricity sector output recorded an expansion during the reporting month. Fertiliser output contracted by 0.8 per cent and refinery products pro- duction fell by 0.3 per cent in March 2017. Coal and steel output grew in double-digits in the last month of FY17. flation (CPI inflation derived from excluding food and fuel) has also remained stubborn and refused to abate much, forcing the RBI to retain its ‘neutral’ monetary policy stance. Additionally, the latest round of house- hold expectations survey for the month of March 2017 has signaled a rise in inflation expectations of house- holds. For the full year FY17, CPI inflation stood at 4.5 per cent as compared to 4.9 per cent in FY16. In contrast, the Wholesale Price Index (WPI) based infla- tion rate moderated marginally to 5.7 per cent in March 2017 after spiking to 6.5 per cent in the month before. The moderation came on the back of a broad-based de- celeration seen across all its major sub-sectors. March 2017 as compared to 4.0 per cent in the same period last year. To be sure, the index measures the out- put 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 sector output fell for the fourth consecutive Consumer price index (CPI) based inflation edged high- er to a 5-month high of 3.81 per cent in March 2017 from 3.65 per cent posted in February 2017, driven by higher inflation in fuel, housing & clothing and footwear. CPI fuel & light inflation jumped to 5.56 per cent in March 2017 from 3.90 per cent in the previous month led by rising global oil prices. Average global crude oil prices were 40 per cent higher on year-on-year basis in the month thus pushing up the imported component of inflation. CPI food inflation stood unchanged from the previous month and stood at 2.54 per cent, as inflation in fruits, vegetables, eggs and meat rose, while that in pulses, cereals and sugar inflation slipped. Core CPI in- Outlook The contraction in industrial output in February 2017 after a positive upturn in January 2017 as well as the increased volatility of the IIP print is a matter for concern. It is hoped that the adoption of the new IIP series with the base 2011-12, would display lower volatility and be a better reflection of contemporary market realities. Leaving aside the volatility issues, going forward, the lagged impact of interest rate reductions and 7th Pay Commission handouts are expected to cushion demand and boost industrial activity. CPI Inflation Edges Up to a 5-Month High
  • 17. 15 DOMESTIC TRENDS APRIL 2017 Primary articles inflation slows down led by deceleration in its non-food & minerals com- ponent Amongst the WPI sub-categories, inflation in primary articles slowed down to 4.6 per cent in March 2017 from 5.0 per cent in the previous month due to a moderation in its non-food and minerals components. Within pri- mary articles, inflation in food sub-category stayed firm at 3.1 per cent in the reporting month, while non-food component registered a sharp deceleration to 4.9 per cent from 6.5 per cent in the previous month. Fuel inflation moderates even as global crude oil prices rise during March 2017 Inflation in the fuel group of WPI also moderated to 18.2 per cent in March 2017 as compared to 21.0 per cent posted in the previous month. Inflation in petrol quick- ened to 20.6 per cent from 16.7 per cent and inflation in diesel group moderated to 26.2 per cent in March 2017 from 33.1 per cent posted in the previous month. For full year FY17, fuel inflation stood higher at 14.5 per cent as compared to 13.2 per cent posted in FY16. Manufacturing inflation slows down on broad-based moderation of its sub-sectors Inflation in the manufactured group slowed down to 3.0 per cent in March 2017 from 3.7 per cent in the previous month. Manufacturing food inflation slid down further to 7.0 per cent from 9.3 per cent in the month before. Meanwhile, manufacturing non-food inflation (popular- ly called as core inflation and a proxy for demand-side pressures in the economy) continued to moderate to 2.1 per cent in March 2017 as compared to 2.4 per cent in February 2017. Manufacturing inflation stood at 1.2 per cent in FY17 as compared to 1.0 per cent posted in FY16.
  • 18. 16 DOMESTIC TRENDS ECONOMY MATTERS Outlook While CPI inflation has accelerated in March 2017, it still continues to be within the RBI’s comfort zone, which prescribes CPI to remain within the 4 per cent level with a two-percentage point-band on either side. WPI inflation meanwhile moderated marginally. However, the outlook for international crude prices has eased recently and is likely to provide stability to the inflation environment, going forward. Upside risks have also eased on account of the ongoing reforms initiatives and supply-side measures taken by the government. Additionally, the prospect of normal monsoon will also lead to a moderation in food inflation, going forward. In its first bi-monthly monetary policy meeting held on April 6th , 2017, the Reserve Bank of India (RBI) kept the repo rate unchanged while narrowing the monetary policy corridor. The step has been taken to align the ef- fective operating rate with the policy rate. To be sure, repo rate was kept unchanged at 6.25 per cent, while the reverse repo rate was hiked by 25 bps to 6.0 per cent and the Marginal Standing Facility (MSF) rate was reduced by 25 bps to reach 6.50 per cent. The narrow corridor will help in aligning the operating rate with the Growth forecast increased with risks evenly balanced On the growth front, RBI has projected a rise in GVA growth to 7.4 per cent in 2017-18 from 6.7 per cent in 2016-17, with risks evenly balanced. As per the RBI state- ment, several favourable domestic factors are expected to drive this acceleration. policy rate while at the same time aid in developing the term reverse repo market. This will also help in curbing the volatility in money market rates. As per the RBI’s statement, the decision of the Mon- etary Policy Committee (MPC) was consistent with a neutral stance of monetary policy in consonance with the objective of achieving the medium-term target for Consumer Price Index (CPI) inflation of 4 per cent within a band of +/- 2 per cent, while supporting growth. (a) The pace of remonetisation will continue to gener- ate a rebound in discretionary consumer spending. Activity in cash-intensive retail trade, hotels and restaurants, transportation and unorganised seg- ments has largely been restored. (b) Significant improvement in transmission of past policy rate reductions into banks’ lending rates post demonetisation should help encourage both RBI Maintains Status-Quo; While Narrowing the Policy Corridor
  • 19. 17 DOMESTIC TRENDS APRIL 2017 consumption and investment demand of healthy corporations. (c) Various proposals in the Union Budget should re- kindle capital expenditure, revive rural demand and strengthen social and physical infrastructure, all of which would invigorate economic activity. (d) The imminent materialisation of structural reforms in the form of the roll-out of GST, the institution of Insolvency and Bankruptcy Code and the abolition of Foreign Investment Promotion Board (FIPB) will provide a fillip to investor confidence and bring in efficiency gains. (e) The upsurge in initial public offerings in the prima- ry capital market augurs well for investment and growth. However, the downside risks to growth stem from the subsiding consumer optimism on the outlook for in- come, the general economic situation and employment as polled in the March 2017 round of the Reserve Bank’s consumer confidence survey and, commodity prices, other than crude, hardening further. Inflation forecast revised higher The inflation forecast of the RBI was revised higher, de- spite the existence of balanced risks. CPI inflation is pro- jected to average 4.5 per cent as compared to the old forecast of 4.0 - 4.5 per cent range in H1FY18 and 5.0 per cent in H2FY18. The key upside risk to inflation on the domestic front includes, uncertain monsoons, 7th pay commission impact, one-off effects from the implemen- tation of GST and high general government deficit led by states which is likely to be aggravated by farm loan waiver. On the global front, the rising commodity prices and the volatility in global financial markets pose upside risks to domestic inflation. While, subdued global crude prices and record food grain production will limit the upside for inflation. RBI working hard to maintain favourable liquidity conditions for operation of mon- etary policy Following demonetisation, a persistent large structural liquidity surplus has impacted the banking system. The Reserve Bank has absorbed surplus liquidity, using a mix of both conventional and unconventional instru- ments, to ensure that the money market rates remain aligned to the repo rate. With a gradual decline in the magnitude of the surplus from its peak in early January and due to expiration of securities authorised under the Market Stabilization Scheme (MSS), the Reserve Bank has progressively moved to variable rate reverse repo operations for absorbing surplus liquidity, some of which may persist through 2017-18. RBI announces a slew of developmental and regulatory policies as well Apart from the aforesaid monetary policy changes, the RBI also announced a slew of regulatory changes which included, allowing banks to make investment in real estate investment trusts (REITs), raising the minimum fund requirements of asset reconstruction companies (ARCs), allowing collateral substitution under repo that will give banks more funds to lend and simplifying hedg- ing facility for forex exposure. Going forward Going forward, the RBI stressed that its future course of monetary policy action will largely depend on the in- coming data on how the macroeconomic conditions are evolving. Though the banks have reduced their lending rates, further scope for a more complete transmission of policy impulses remains, including for small savings/ administered rates. Along with rebalancing liquidity conditions, it will be the Reserve Bank’s endeavour to put the resolution of banks’ stressed assets on a firm footing and create favourable conditions for bank cred- it to recover and flow to the productive sectors of the economy. Outlook RBI’s decision to keep the policy rates unchanged while retaining the neutral stance was on expected lines. The status-quo on rates was based on a cautious assessment of the upside risks to inflation while maintaining a positive outlook on growth. CII is hopeful that going forward the RBI would shift its policy stance from neutral to accom- modative and effect a cut in interest rates to refurbish business sentiment, support domestic demand and trigger the turn of the investment cycle.
  • 20. 18 DOMESTIC TRENDS ECONOMY MATTERS In continuation with the double-digit growth exhibited by exports during February 2017, merchandise exports grew by 27.59 per cent during March 2017 to reach US$29.3 billion as compared to 17.5 per cent growth posted in the previous month. This is the seventh con- secutive month of a rise in exports this year. Exports have witnessed continuously positive growth num- bers since September 2016 and peaked in March 2017. Robust growth in exports during March 2017 came on the back of healthy shipment of petroleum products which jumped by 69 per cent while engineering goods were up 47 per cent. Cumulatively for the April-March FY17 period, exports grew by 4.7 per cent standing at US$274.6 billion, as against exports of US$262.3 billion over the same period last year. However, the robust monthly data failed to boost annual exports to the Trade deficit widens With imports growing faster than exports, the trade deficit widened to US$10.44 billion in March 2017 from US$4.4 billion a year ago. Global merchandise trade is expected to rebound this year, with the World Trade Or- ganization (WTO) forecasting a growth of 2.4 per cent in 2017 as compared to 1.3 per cent in 2016. This progno- sis augurs well for the exports outlook of India, going forward. US$300 billion mark. A revival of growth in developed economies and surge in commodity prices in the second half of 2016-17, boosted Indian shipments even though the rupee was firm against the dollar. Imports grow by double-digits in March 2017 Merchandise imports also accelerated by a robust 45.25 per cent to reach US$39.7 billion in March 2017 as com- pared to a 10.7 per cent rise in the previous month. Oil imports in March saw a 101 per cent spike to US$9.7 billion while non-oil imports were up 33.21 per cent at US$29.9 billion. A jump in oil imports was driven by a staggering 33 per cent spike in global Brent prices in March 2017 as compared to March 2016. However, on a cumulative basis, merchandise imports stood at US$380.4 billion during April-March FY17, registering a de-growth of 0.17 per cent on a year-on-year basis. Going forward The signs of revival in the global economy have renewed expectations of a positive export outlook, even though a new wave of nationalism camouflaged as protection- ism is a concern, especially in the services sector. Hence, it is important that the government stresses on boost- ing exports competitiveness in the medium-term by un- dertaking continuous reform measures such as ‘Make in India’, improving ease of doing business etc. Moreover, it’s important to maintain exchange rate at an appro- priate level such that it would promote exports. In the past, a strong currency has hugely impacted exports. Exports Grow at a Stellar Pace in March 2017
  • 21. 19 DOMESTIC TRENDS APRIL 2017 According to the borrowing calendar of the govern- ment for H1FY18 released on 28th March 2017, the gov- ernment is scheduled to borrow 64.1 per cent (which translates into Rs 3.72 lakh crore) of its gross require- ment of Rs 5.8 lakh crore in the first half, higher than FY17. In absolute terms, the gross borrowing in H1FY18 is higher by 4.8 per cent as compared to the same pe- riod in FY17. Generally, the government borrows 60-62 per cent of the total in the first half so that the second half is left for private companies to get their funds. Oth- erwise, government borrowing crowds out the private sector. The Government also released the T-bill auction calendar for Q1FY18 wherein it plans to issue securities to the tune of Rs 1.82 lakh crore. In contrast to the higher gross borrowings of the gov- ernment in the first-half of FY18, the net borrowing of government is pegged at Rs 2.32 lakh crore in H1FY17 (out of total net borrowing which is pegged at Rs 4.25 lakh core for FY18) which is a reduction to the tune of 6.3 per cent as compared to the same period in FY17. The auction calendar showed that there would be 24 auctions in the first half of this fiscal, most of them hav- ing a size of Rs 15,000 crore. Additionally,there will be four auctions worth Rs 18,000 crore each which were held on 13th April, 2017. However, the maturity period of the bonds is expected to increase. Presently, the aver- age maturity period of government bonds is about 10.5 years. The borrowing calendar, released on the RBI website, showed that a considerable number of bonds would be issued with a maturity period of 20 years and above. Earlier, these long-tenure bonds were issued sparingly. The bond with the longest maturity period in the market is a 40-year-old one, issued first in October 2015. Government to Raise 64% of Borrowing in H1FY18 This is mainly due to the heavy debt redemption of Rs 1.4 lakh crore during H1FY18. There is no gainsaying the importance of monsoon for an agrarian economy like India. The Indian economy still remains a gamble on monsoons as Lord Curzon once fa- mously remarked. It is a common notion that monsoon rains greatly impact the health of the economy. Good monsoons correlate with a booming economy while weak or failed monsoons (droughts) result in wide- spread agricultural losses and substantially hinder over- all economic growth. Although the extent of the impact on the overall economy may have moderated over the years, it could still shave off a few basis points from GDP growth. Given the above context, the occurrence of normal monsoons this year would be important for the econ- omy given the current weak demand conditions post demonetisation. In some good news for the economy, as per the Indian Meteorological Department’s (IMD) first advance forecast of southwest monsoon, the mon- soon seasonal rainfall is likely to be 96 per cent of the Long Period Average (LPA) with an error of ± 5 per cent. Forecast assessment suggests 38 per cent of probabil- ity for near normal monsoon rainfall. IMD categorizes rainfall in the 96-104 per cent long-period average range as normal and rainfall between 104-110 per cent of LPA as above normal. IMD issues various monthly and seasonal forecasts of rainfall for the southwest monsoon season (June to September). Operational forecasts for the southwest monsoon season rainfall are issued in two stages. The second stage forecast will be issued in June 2017. These forecasts are prepared using state-of-the-art Statistical Ensemble Forecasting system (SEFS) that is critically reviewed and improved regularly through in-house re- search activities. Monsoon Seasonal Rainfall likely to be 96% of the Long Period Average
  • 22. 20 DOMESTIC TRENDS ECONOMY MATTERS The CII Business Confidence Index (CII- BCI) for January- March 2017 quarter rose to an all-time high of 64.1 as against 56.5 recorded in the previous quarter. The sharp increase in business sentiment was majorly being driven by a significant uptrend in the Expectations Index (EI) though the Current Situation Index (CSI) also improved marginally. The respondents in the survey were asked to provide a view on the performance of their firm, sector and the economy based on their perceptions about the previous and current quarter. The CII-BCI was then constructed as a weighted average of the Current Situations Index (CSI) and the Expectation Index (EI). Both the CSI and GDP growth in 2016-17 expected to be re- vised down by 41 per cent and revised up by 37 per cent of respondents The second advance estimates pegged GDP growth at 7.1 per cent on y-o-y basis in FY17. However, nearly two-fifth of the respondents (41 per cent), expect a downward revision in the data while 37 per cent expect an upward revision. The next annual estimate will be released on 31st May, 2017, along with the data for the fourth quarter of FY17 (Jan-Mar 2017). Close to half of the respondents expect CPI inflation to rise above the 3.2 per cent level recorded in January EI are at their record peaks but a comparison of the two indicates a sharp improvement in the EI due to a strong improvement in sentiment across all categories. CSI, on the other hand, improved despite a drop in sentiment about the overall economy. It would be pertinent to note that CSI reflects sentiment for the previous quar- ter, i.e. Q3FY17 (Oct-Dec 2016), in which the demoneti- zation announcement had engendered uncertainty and transitory disruption that could have influenced the re- sponses. In the survey, firms, when asked to rank their concerns in the coming six months, stated low domes- tic demand followed by fragile global economic recov- ery and a rise in commodity prices as their key concerns. About 47 per cent of the respondents expect inflation levels to rise above the 3.2 per cent mark recorded in January. This rise in inflationary expectations is mainly on account of the increase in global commodity prices which has resulted in higher input costs. The RBI has projected inflation to rise to 4.0-4.5 per cent in the first half and further to 4.5- 5.0 per cent in the second half of FY18. Majority of the respondents (52 per cent) ex- pect to see the positive impact of GST after a year of its implementation The Goods and Services Tax (GST) is likely to be imple- mented around 1st July, 2017 and more than half of the respondents (52 per cent) anticipate that it will take a CII Business Confidence Index Scores an All-Time High in the Jan-March Quarter
  • 23. 21 DOMESTIC TRENDS APRIL 2017 year to see a positive impact on the Indian economy. Cumulatively, a significant proportion of respondents (85 per cent) feel that it could take anywhere between 6 months to a year to see the positive impact of GST. Majority of the respondents expect capac- ity utilization to improve in Jan-Mar 2017 quarter Around 55 per cent of respondents expect capacity uti- lization to be in range of 75-100 per cent in Jan-March 2017 quarter as compared to 33 per cent of respondents who expected the same in the Oct-Dec 2016 quarter. Overall expectations of capacity utilization have im- proved with a cumulative 64.7 per cent of the respond- ents anticipating capacity utilization levels to be above 75 per cent while only 35.8 per cent of the respondents experienced the same in the Oct-Dec 2016 quarter. A significant proportion of the respondents expect an increase in new orders (60 per cent) and sales (63 per cent) in Jan-Mar 2017 Nearly two-thirds of the respondents (63 per cent) an- ticipate an increase in sales in Jan-Mar 2017 as against 39 per cent of the respondents who experienced an increase in sales in the Oct-Dec 2016 quarter. Paral- lelly, about 60 per cent of the respondents foresee an increase in new orders in the Jan-Mar 2017 quarter as compared to 41 per cent of the respondents who wit- nessed the same in the Oct-Dec 2016 quarter. Profit expectations have improved with a large proportion of the respondents expect- ing an increase in PAT in Jan- Mar 2017 A major share of the respondents (44 per cent) antici- pate an increase in profits after tax (PAT) in the Jan-Mar 2017 quarter as compared to 31.6 per cent of the re- spondents who experienced the same in the preceding quarter. It is interesting to note that profit expectations have improved in the Jan-Mar 2017 quarter even though a large share of the respondents (40 per cent) experi- enced a decline in PAT in the Oct-Dec 2016 quarter.
  • 25. 23 POLICY FOCUS POLICY FOCUS APRIL 2017 1. Cabinet approves setting up of Rail Development Authority The Union government has approved the setting up Rail Development Authority (RDA), an independent regula- tor to recommend passenger and freight fares and set service level benchmarks. Setting up of RDA will help improve the services offered to passengers, provide comfort to investors and enhance transparency and ac- countability. The RDA will be formed through an executive order of the government, according to the cabinet decision. The need of having a rail regulator has been emphasized by various committees for past many years since 2001. This includes Expert Group under the Chairmanship of Rakesh Mohan in 2001, the National Transport Develop- ment Policy Committee (NTDPC) in 2014 and Bibek De- broy’s Committee in 2015 (Committee for Restructuring of Railway Ministry and Railway Board). Following are the key highlights and functionalities of the newly formed RDA: 1) It will make suggestions regarding policies for pri- vate investment to ensure reasonable safeguards to PPP investors and to resolve disputes over future concession agreements. 2) The RDA will act within the parameters of the Rail- way Act, 1989 and its major functions will be tariff determination and recommending principles for classification of commodities, framing principles for social service obligation and guidelines for track access charge. 3) It will also be responsible for setting efficiency and performance standards besides global best prac- tices and benchmarking. 4) The Authority will have a Chairman and 3 mem- bers and can engage experts from relevant areas. The Chairman and the members of RDA will have a term of five years and can be removed by the cen- tral government on certain grounds like insolvency, conviction, misbehaviour, physical and mental inca- pability. 5) RDA will help the government to take appropriate decisions on pricing of services commensurate with costs, suggest measures for enhancement of non- The important policy announcements by the Government in the month of April 2017 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.
  • 26. ECONOMY MATTERS 24 POLICY FOCUS fare revenue, protection of consumer interests, promoting competition, encouraging market de- velopment and creating a positive environment for investment. 6) The authority will also suggest measures for ab- sorption of new technologies and human resource development and provide a framework for non-dis- criminatory open access to the Dedicated Freight Corridor infrastructure. 2. CBEC releases draft rules on As- sessment and Audit under GST and E-Way Bill The Central Board of Excise and Customs (CBEC) has re- leased two new draft rules on ”Assessment and Audit” under GST and ”Electronic Way Bill (e-way bill)” in the public domain on 14th April 2017. The key highlights of the rules are as under: (a) Assessment and Audit The rules provide for detailed procedure and forms to be filed in connection with scrutiny of returns, provisional, final and best judgement assessment. Specifically, every registered person requesting for payment of tax on a provisional basis in accordance with the provisions of sub-section (1) of section 60 shall furnish an application in FORM GST ASMT-01, along with the documents in support of his request, electronically through the Common Portal, either directly or through a Facilitation Centre notified by the Commissioner. Forms are also provided for spe- cial audit to be conducted by chartered accountant/ cost accountant in certain specified cases. (b) E-Way Bill The rules mandate the generation of e-way bills for movement of goods of value exceeding Rs 50,000, that tax officials can inspect anytime during transit to check tax evasion. E-way bill will have to be is- sued online on the GST common portal and it can be cancelled only within 24 hours of its issuance. The person in-charge of conveyance will be required to carry the invoice or bill of supply or delivery chal- lan, as per the draft electronic way (e-way) bill rules that have been released by the CBEC. The Government had invited comments on these draft rules from the stakeholders by 21st April 2017. 3. CBEC releases draft rules on GST The Central Board of Excise and Customs (CBEC) has re- leased three new draft rules on Accounts and Records, Appeals and Revision, and Advance Ruling under GST, in the public domain on 19th April 2017. The notable as- pects of the rules are as follows: Draft Accounts and Records Rules • Accounts and records are to be maintained sepa- rately for each line of activity such as manufactur- ing, trading and provision of service. A separate account for receipt of advances and adjustments therein has to be maintained. • Books of account should be kept at the principal place of business and other places of business men- tioned in the certificate of registration. • Records may be maintained in an electronic form and a log of every entry edited or deleted should be maintained. • The rules provide for specific records to be main- tained by the following categories of persons: o Agents o Works contractors o Owner or operator of warehouse o Transporters • If any taxable goods are found to be stored at any place other than the premises declared for storing of goods, the goods shall be deemed to be supplied and tax may be determined. Draft Appeals and Revision Rules • Appeals before the appellate authority/appellate tribunal can be filed electronically in prescribed forms and a hard copy of the certified copy of the decision or order appealed against along with sup- porting documents should be filed within seven days. • On filing an appeal electronically, a provisional ac- knowledgement shall be issued to the appellant im- mediately. • The appeal shall be treated as filed only when the final acknowledgement indicating the appeal num-
  • 27. 25 POLICY FOCUS APRIL 2017 ber is issued. Draft Advance Ruling Rules • An application for obtaining an advance ruling shall be made in FORM GST ARA-1 to the Authority for advance ruling on the common portal with a fee of Rs 5,000. • An appeal against such Advance Ruling shall be filed in FORM GST ARA-2 to the Appellate Authority for advance ruling with a fee of Rs 10,000. • The above-mentioned appeal should be accom- panied by relevant documents supporting the grounds mentioned thereunder. 4. Taxation (Amendment) Bill, 2017 passed By Lok Sabha With the expected roll out of GST on July 1st, 2017, the various current indirect taxes levied on sale of goods or supply of services by the Central or State Government will be subsumed into GST. Therefore, to make the Cus- toms Act & Excise Act compliant with GST, Lok Sabha on 6th April 2017 passed The Taxation (Amendment) Bill, 2017. With the Amendment Bill, 2017 the Government seeks to amend Customs Act, 1962, the Customs Tariff Act, 1975, the Central Excise Act, 1944, the Finance Act, 2001, the Finance Act, 2005, and repeal provisions of few Acts. Following are the key highlights of the major amendments of the Taxation (Amendment) Bill, 2017. (a) Currently, Central Excise Duty is levied on various excisable goods such as tobacco, petroleum prod- ucts, rubber, oils, vehicles, etc. This is proposed to be changed to levy duty only on certain kind of: (i) petroleum products such as motor spirit, high speed diesel, aviation turbine fuel, and (ii) tobacco products. (b) Goods imported will be liable to the GST Compensa- tion Cess. The Cess will be levied on the aggregate of value of the imported goods, Customs Duty lev- ied under the Act, and any other amount charge- able under any law. (c) To repeal Central Excise Tariff Act, 1985 (CETA) on enactment of Central Goods and Services Tax Bill, 2017. (d) Fourth Schedule to Central Excise Act, 1944 (CEA) is proposed to be introduced to provide for classi- fication and duty rates for specified petroleum and tobacco products which will continue to attract central excise duty even after enactment of goods and services tax. (e) To levy duty to be called ‘Central Value Added Tax’ (CENVAT) on all excisable goods manufactured in India (excluding Special Economic Zones) at the rates specified in Fourth Schedule to CEA. (f) The Bill seeks to repeal four laws which include the Sugar Cess Act, 1982 and the Jute Manufacturers Cess Act, 1983. It also repeals certain provisions of 10 laws which include the Rubber Act, 1947, the Industries (Development and Regulation) Act, 1951, and the Coal Mines (Conservation and Develop- ment) Act, 1953. Any un-collected duties (arrears) under the above Acts shall be collected by the re- spective collecting agencies and remitted to the Consolidate Fund of India. 5. Centre issues draft rules on e-wal- let payments The Centre has issued draft rules to ensure integrity, se- curity and confidentiality of electronic payments made through prepaid payment instruments (PPIs), popularly called e-wallets. The draft rules, on which the Ministry of Electronics and Information Technology has sought public comments, make it mandatory for e-PPI (elec- tronic pre-payment instrument) issuers to develop an information security policy that ensures that the sys- tems operated by them are secure. The Information Technology (Security of Prepaid Instru- ments) Rules, 2017, define an e-PPI issuer as a “person operating a payment system issuing prepaid payment instruments to individuals/organisations” under the ae- gis of Reserve Bank of India. The rules make it compul- sory for e-PPIs to publish on their websites and mobile applications both their ‘privacy policy’ and terms for use of their payment systems. The draft also details the re- quirements of a privacy policy. The rules mandate that e-PPIs should carry out risk assessment to spot security risks and also ensure adequate due diligence is done be- fore issuing PPIs. 6. Parliament passes Employee’s Compensation Bill Both Houses of the Parliament have passed The Em-
  • 28. ECONOMY MATTERS 26 POLICY FOCUS ployees Compensation (Amendment) Bill, 2016 in the re- cently concluded Budget session of the Parliament. The Bill amends the Employee’s Compensation Act, 1923. It ensures compensation up to Rs 1 lakh to an employee injured in an industrial accident and imposes hefty pen- alty in case of any violation by the employers. Following are the key salient features of the Bill: • The Bill makes it mandatory for employers to in- form the employee of his right to compensation under the Act. Such information must be given in writing at the time of employing him. • As per the Bill, employer will be penalised if he fails to inform his employee of his right to compensa- tion. Such penalty may be between Rs. 50,000 to Rs. 1 lakh. • The Bill raises the amount in dispute related to com- pensation, distribution of compensation, award of penalty or interest, etc to Rs. 10,000. It permits the central government to further raise this amount. Provision of withholding payments pending appeal, if an employer has appealed against a Commission- er’s order, has been deleted. • The Bill provides that any dispute related to an em- ployee’s compensation will be heard by a Commis- sioner (with powers of a civil court). Appeals from the Commissioner’s order, related to a substantial question of law, will lie before the High Court. 7. RBI releases draft note on tri-party repo on govt securities, corporate bonds The Reserve Bank on April 11th , 2017 released the draft framework on tri-party repo facility, which when intro- duced, will enable market participants to use the under- lying collateral more efficiently and facilitate develop- ment of the term repo market. Tri-party repo is a type of repo contract where a third entity (apart from the borrower or lender) acts as an intermediary between the two parties to the repo to facilitate services like col- lateral selection, payment and settlement, custody and management during the life of the transaction, the cen- tral bank said in the draft paper which is open for public comments till May 5th , 2017. The paper highlights that all entities with a minimum net owned fund of Rs 25 crore and having regulatory approval will be eligible to act as a tri-party agent. This includes banks, depositories and other entities. Accord- ing to the RBI, participants will have to enter into a separate agreement with these agents for every repo transaction. Further, the paper has highlighted that tri-party repos can be traded over-the-counter (OTC), including on electronic platforms, and will have to be reported within 15 minutes of the trade to the tri-party agent (or the third entity). On the proposed tenor, set- tlement, haircut and disclosures norms, the draft said these will be identical to those applicable to normal re- pos, as specified on rep directions issued on February 3, 2015 and August 25, 2016 or as permitted by RBI from time to time. 8. Government clears way for Indian firms to merge with foreign com- panies The Centre has allowed Indian companies to merge with companies abroad, thus paving the way for a broader Merger & Acquisition (M&A) landscape. However, such outbound mergers will be allowed only with the prior approval of the Reserve Bank of India (RBI). Indian companies will now be able to merge into foreign com- panies based in Mauritius, the Netherlands, Singapore, UK, US, Abu Dhabi, DIFC (Dubai) and UAE. The Corpo- rate Affairs Ministry (MCA) has passed the necessary executive orders under the new Companies Act, 2013 to bring this into effect from April 13th , 2017. While explicitly allowing Indian companies to merge with companies abroad, the Ministry of Corporate Af- fairs has also reaffirmed the existing legal position of allowing foreign companies to merge with Indian firms here through a scheme of arrangement (inbound merg- ers). The erstwhile Companies Act 1956 had no specific provision allowing Indian companies to go for outbound mergers. Only inbound mergers (foreign companies merging into Indian companies) were allowed under this law, which was replaced by the new Companies Act, 2013. Although the doors have now been opened for In- dian companies to go for outbound mergers, the latest Company law still does not allow cross-border demerg- ers. This would mean an Indian company’s business division cannot be hived off and de-merged through a scheme of arrangement into a foreign company.
  • 29. 27 POLICY FOCUS APRIL 2017 9. RBI issues new draft rules for M&As The Reserve Bank of India (RBI) on 26th April, 2017 pro- posed a fresh set of regulations regarding mergers and acquisitions (M&As) which would seek reporting of such actions to be more stringent and time-bound, and provide for mandatory permission for all deals which are not on the automatic route. RBI has proposed these regulations under the Foreign Exchange Management Act, 1999 (FEMA) in order to address the issues that may arise when an Indian company and a foreign com- pany enter into Scheme of merger, demerger, amalga- mation, or rearrangement. These regulations stipulate conditions that should be adhered to by the compa- nies involved in the Scheme. The regulations shall be named Foreign Exchange Management (Cross Border Merger) Regulations. The regulations make reporting of any cross-border activity mandatory within 180 days from the date of sanction. The Central Bank has invited stakeholder comments on the proposed regulations by 9th May, 2017. 10. SEBI allows options trading in com- modities Securities and Exchange Board of India (SEBI) on 26th April, 2017 has allowed commodity derivative exchang- es to launch options contracts for trading with the aim of increasing liquidity and attracting more investors to the commodities market. The exchanges have been al- lowed to trade in options following a recommendation by the Commodity Derivatives Advisory Committee (CDAC), SEBI said in a circular. At present, only futures contracts based on individual commodities are traded on commodity bourses. Every exchange will need prior approval from SEBI for launching options trading for which detailed norms will be released later, according to the circular. The move comes exactly a year after the erstwhile commodity markets regulator, the Forward Markets Commission, was merged with SEBI. 11. Cabinet allows unrestricted export of all certified organic agricultural products The Cabinet Committee on Economic Affairs, chaired by the Prime Minister Shri Narendra Modi, has given its approval for removal of all quantitative ceilings on in- dividual organic products and allowed unrestricted ex- ports of all organic agricultural and organic processed products irrespective of any existing or future restric- tion/prohibition on the export of their basic product (non-organic). However, in respect of organic pulses and lentils, in view of their acute shortage in the coun- try, the quantitative ceiling on exports will continue but enhanced from the existing 10,000 MT per annum to 50,000 MT per annum. Removal of quantitative celling on wheat, sugar, non- basmati rice, organic sugar and increasing the limit on export of organic pulses is expected to contribute to the Government’s objective of doubling the farmers’ in- come. It will lead to reduction in input costs in farming and gaining premium price for organic agriculture prod- ucts and in the process resulting in increased adoption of organic agriculture by farmers. All organic products exports are certified by Agricul- tural & Processed Food Products Export Development Authority (APEDA) under the National Programme for Organic Production (NPOP). Organic agriculture is a holistic production management system wherein the products are grown in accordance with principles of sustainability. Government is supporting the farm- ers and exporters to tap huge opportunity that exists within the country and abroad for organic agriculture products. A stable and consistent export policy relating to export of organic products would allow exporters to make long term commitment to the buyers and also establish linkages with the farmers. This is likely to result in en- hanced realization to farmers from organic production. A stable export policy on organic agriculture products would complement various Government programs like National Mission on Sustainable Agriculture (NSAM), Paramparagat Krishi Vikas Yojana (PKVY), Organic Value Chain Development in North Eastern Region (OVCD- NER) which have been taken up to encourage organic agriculture.
  • 30. 28 GLOBAL TRENDS China’s Economic Growth Steady at 6.9% in the First Quarter of 2017 ECONOMY MATTERS Growth in GDP in China continued its uptrend, and increased to 6.9 per cent in the first quarter of The 6.9 per cent growth in GDP, in the first quarter of 2017, was largely led by growth in the tertiary sector which witnessed an increase to the tune of 7.7 per cent. 2017, as compared to a growth of 6.7 per cent in the first quarter of 2016. While it had hit a trough in the early quarters of 2016, it is soon returning to its previous lev- els. Secondary sector saw a growth of 6.4 per cent and the primary sector grew by 3.0 per cent in the first quarter of 2017.
  • 31. 29 GLOBAL TRENDS APRIL 2017 Looking at the growth rate of individual industries, IT industry stood at the top with a 19.1 per cent growth in the first quarter of 2017. The renting & leasing sector saw a growth of 10.2 per cent. Transport & storage sec- tor grew by 8.7 per cent growth and real estate sector The Purchasing Managers’ Index (PMI) for China in March 2017 stood at 51.8, indicating an expanding econ- omy. PMI is an indicator of the economic health of the manufacturing sector. It is based on five major indica- tors: new orders, inventory levels, production, supplier deliveries and the employment environment. A reading growth stood at 7.8 per cent in the first quarter of 2017. Apart from these, wholesale & retail trade, hotels & res- taurants and manufacturing sectors also witnessed a growth rate which was higher than the aggregate GDP growth experienced during the first quarter of 2017. above 50 indicates that the economy is expanding. With the exception of July 2016, it has witnessed a positive trend during the last year. In March 2017, while new or- ders, production, supplier deliveries saw an upturn; in- ventory levels and the employment environment saw a downturn.
  • 32. 30 GLOBAL TRENDS ECONOMY MATTERS Growth of industrial production accelerated with profit for enterprises rising rapidly In the first quarter of 2017, the y-o-y real growth rate of total value added of industrial enterprises above the designated size was 6.8 per cent, as compared to 5.8 per cent in the same period last year, and 6.0 per cent in the whole of 2016. An analysis by types of ownership showed that the value added of the state holding enter- prises on y-o-y basis went up by 6.2 per cent; collective enterprises went up by 0.5 per cent; share-holding en- terprises rose by 6.9 per cent; and enterprises funded by foreign investors grew by 6.9 per cent. In terms of sectors, the value added of manufacturing grew by 7.4 per cent and the production and supply of electricity, thermal power, gas and water increased by 8.9 per cent in 1Q17. The industrial structure continued to improve. The value added of high-tech industry and equipment manufacturing industry grew by 13.4 per cent and 12.0 per cent respectively in 1Q17, 2.6 percent- age points and 2.5 percentage points higher respective- ly than the whole of 2016. Service industry grew fast and maintained strong expansion In the first quarter of 2017, the index of national ser- vices production increased by 8.3 per cent on y-o-y ba- sis 0.1 percentage point higher than that of the same period last year. Specifically, information transmission, software and information technology services, and transport, storage and postal services maintained high growth rates. The growth rates of wholesale & retail trade and accommodation & catering trade also picked up considerably. Investment in fixed assets grew steadily and the floor space of commercial buildings for sale continued to decrease In the first quarter of 2017, investment in fixed assets (excluding rural households) saw a y-o-y growth of 9.2 percent, as compared to 10.3 per cent in the whole of 2016. Specifically, the investment by the state holding enterprises saw a rise of 13.6 percent; private invest- ment went up by 7.7 per cent, accounting for 61.1 per cent of the total investment. The investment in the pri- mary industry was up by 19.8 per cent; the secondary industry was up by 4.2 percent, among which the invest- ment in manufacturing was up by 5.8 per cent and the tertiary industry saw an increase of 12.2 per cent. Invest- ment in infrastructure saw an increase of 23.5 percent. The investment in high-tech industry increased by 22.6 per cent, 13.4 percentage points faster than the growth in total investment. The total investment in newly-start- ed projects saw a drop of 6.5 per cent on y-o-y basis. The total investment in real estate development in the first quarter saw a y-o-y growth of 9.1 per cent. In particular, the investment in residential buildings went up by 11.2 per cent. Market sales maintained stable and online retailing grew fast In the first quarter of 2017, the total retail sales of con- sumer goods reached saw a y-o-y rise of 10.0 percent, as compared to 10.4 per cent in the whole of 2016. Ana- lyzed by different areas, the retail sales in urban areas went up by 9.7 per cent, and the retail sales in rural ar- eas went up by 11.9 per cent. The online retail sales saw a y-o-y growth of 32.1 per cent. Market sales maintained stable and online retailing grew fast In the first quarter of 2017, the total retail sales of con- sumer goods reached saw a y-o-y rise of 10.0 percent, as compared to 10.4 per cent in the whole of 2016. Ana- lyzed by different areas, the retail sales in urban areas went up by 9.7 per cent, and the retail sales in rural ar- eas went up by 11.9 per cent. The online retail sales saw a y-o-y growth of 32.1 per cent. Total value of imports and exports increased rapidly with improved structure of foreign trade The total value of imports and exports in the first quar- ter of 2017 saw an increase of 21.8 per cent, as com- pared to a contraction to the tune of 0.9 per cent in the whole of 2016. The total value of exports was up by 14.8
  • 33. 31 GLOBAL TRENDS APRIL 2017 Consumer price inflation increased mildly in Q1:2017 In the first quarter of 2017, the consumer price inflation went up by 1.4 per cent on y-o-y basis as compared to 2.1 per cent in the fourth quarter of 2016. Specifically, CPI inflation went up by 1.5 per cent in the urban areas and 1.1 per cent in the rural areas. The supply-side structural reforms were in- tensified and the economic structure was further optimized Efforts of cutting overcapacity, reducing inventory, deleveraging, lowering costs and strengthening weak links have made new progress in China. In the first quar- ter of 2017, the capacity utilization rate of industrial en- terprises above designated size was 75.8 per cent, 2.0 percentage points higher than that in the fourth quar- ter of 2016. The asset-liability ratio and cost of industrial enterprises both decreased. The investment in weak areas grew rapidly. In the first quarter of 2017, investment in the manage- ment of ecological protection and treatment of environ- ment pollution,management of public facilities, agricul- ture and management of water conservancy increased by 48.1 per cent, 27.4 per cent, 24.6 per cent and 18.3 per cent respectively, or 38.9 percentage points, 18.2 percentage points, 15.4 percentage points and 9.1 per- centage points higher than the growth in total invest- ment. Going Forward The Chinese economy in the first quarter maintained the momentum of steady and sound development. Economic growth rate picked up slightly; structural ad- justment was continued; innovation and development gathered speed; people’s livelihood improved steadily and effectively; positive factors were accumulated; all showing a good start of the national economy. How- ever, the conditions are still complicated around the world, the structural contradictions are prominent in China and the momentum of stable but progressing economy needs be further consolidated. percent; the total value of imports was up by 31.1 per cent. The trade balance was in surplus. The export of mechanical and electronic products still took the lead. The export of mechanical and electronic products in- creased by 15.1 percent, accounting for 58.1 per cent of the total value of exports.
  • 34. 32 GLOBAL TRENDS ECONOMY MATTERS US Economy Recovering Slowly Growth in the US economy during 2016 moderated to 1.6 per cent as compared to 2.6 per cent in 2015, largely due to a contraction in private domestic investment to the tune of 1.6 per cent led by a downturn in both residential and non-residential investment. Growth in personal consumption expenditure also moderated to 2.7 per cent in 2016 as compared to 3.2 per cent in 2015, majorly due to a downturn in expenditure on goods, even as services saw a near flat trend. Similarly, growth Quarterly data prints reveal a more optimis- tic trend in growth The quarterly trend was more positive as the economy witnessed a growth of 2.1 per cent in the fourth quar- ter of 2016, as compared to revised 0.9 per cent in the fourth quarter of 2015. The growth was also a positive trend over the previous three quarters in 2016. This was however largely contributed by personal expenditure and export performance, even as government expendi- ture and private investment saw a downturn. Howev- er, the advance numbers suggest that quarterly GDP in government consumption expenditure and gross in- vestment also declined to 0.8 per cent in 2016 as com- pared to 1.8 per cent in 2015, led by steep decline in growth of state and local expenditure, even as federal expenditure improved marginally. Growth in exports improved, albeit marginally, to 0.4 per cent in 2016 as compared to 0.1 per cent in 2015. Imports, which are a subtraction from GDP, saw a decline in growth to 1.2 per cent as compared to 4.6 per cent in 2015. growth moderated to 0.7 per cent in first quarter of 2017 on lower consumer spending. Growth in personal expenditure picked up in the fourth quarter of 2016, standing at 3.1 per cent as compared to 2.6 per cent in the comparable quarter a year ago, majorly led by an upturn in expenditure on both goods and services. Growth in private domestic investment was lower, at 0.1 per cent, in the fourth quarter of 2016 as compared to 2.6 per cent in the fourth quarter a year ago, due to a steep decline in residential investment to 1.1 per cent
  • 35. 33 GLOBAL TRENDS APRIL 2017 in the fourth quarter of 2016 as compared to 13.1 per cent in the same quarter in 2015; non-residential invest- ment also declined marginally. Growth in government Trade performance provides a fillip to growth Trade performance provided a large boost to growth. This is borne out from the fact that exports witnessed growth of 1.5 per cent, in the fourth quarter of 2016, as compared to a contraction by 2.2 per cent in the consumption expenditure and gross investment mod- erated to 0.2 per cent in the fourth quarter of 2016, as compared to 2.2 per cent in the fourth quarter of 2015, led by decline in both federal and state expenditure. fourth quarter of 2015, largely led by an upturn in ex- port of goods, while services export showed a nearly flat trend. Imports, which are a subtraction from the GDP, increased only marginally to 2.6 per cent in the fourth quarter of 2016, as compared to 2.5 per cent in the fourth quarter of 2015, led by an increase in import of services, even though import of goods declined.
  • 36. 34 GLOBAL TRENDS ECONOMY MATTERS Industry-wise trends on quarterly basis The industry-wise trends for real value added on quar- terly basis reveal that finance & insurance; retail trade; and professional, scientific, & technical services were the leading contributors to the increase in US economic growth in the fourth quarter of 2016. Further, they also revealed that non-durable goods manufacturing was the leading contributor to the deceleration in the real GDP. In the services sector, growth in information services decelerated by 0.9 per cent in the fourth quarter of 2016 after increasing by 8.6 per cent in the previous quarter and was the second leading contributor to the slowdown. The deceleration was primarily attributed to a slowdown in broadcasting & telecommunications. For the finance & insurance industry group, real value added moderated to 6.3 per cent in the fourth quarter, after increasing by 9.0 per cent in the third quarter. The Trends in real gross output by industry on quarterly basis Real gross output—principally a measure of an indus- try’s sales or receipts, which includes sales to final us- ers in the economy (GDP) and sales to other industries (intermediate inputs)—increased in the fourth quarter. Real gross output for retail trade accelerated to 8.0 per cent in the fourth quarter of 2016 on q-o-q basis, after increasing 2.5 per cent in the third quarter. Gross out- put of information services increased by 1.5 per cent in the fourth quarter on q-o-q basis after increasing by 8.5 per cent in the quarter before. The increase was pri- marily attributed to broadcasting and telecommunica- tions, which has now increased for fifteen consecutive quarters. Real gross output in professional, scientific, fourth quarter growth primarily reflected increase in Federal Reserve banks credit intermediation, and re- lated activities, as well as insurance carriers and related activities. Growth in real value added of retail trade quickened to 5.7 per cent in the fourth quarter of 2016, after increas- ing by 2.6 per cent in the previous quarter. The fourth quarter growth primarily reflected an increase in other retail, which includes gasoline stations, as well as build- ing material and garden equipment and supplies stores. Real value added growth in professional, scientific & technical services accelerated to 3.6 per cent in the fourth quarter of 2016 as compared to 2.6 per cent in the previous quarter. This was the eleventh consecu- tive quarter of growth and primarily reflected increas- es in miscellaneous professional, scientific & technical services, which includes industries like architectural & engineering services; scientific research & development services; and management consulting services. and technical services quickened to 3.9 per cent in the last quarter of 2016 on q-o-q basis, after increasing by 1.9 per cent in the previous quarter, primarily reflecting growth in legal services. Going forward In the Federal Reserve’s latest monetary policy meeting held on 3rd May, 2017, the fed funds rate was maintained at 0.75-1.00 per cent. While the overall data prints since the Fed’s last meeting in March 2017 have been largely healthy, the lack of developments on the fiscal front, no sudden pick-up in inflation and weak headline jobs data print for the month of March were the main reasons behind the status-quo decision of the Fed. After this pause, the market implied probability for a June 2017 rate hike currently stands at around 70 per cent.
  • 38. 36 SPECIAL FEATURE India: Growth and Jobs in the New Globalization ECONOMY MATTERS T his article summarises the recently released re- port titled ‘India: Growth and Jobs in the New Globalization’ by the Confederation of Indian In- dustry (CII) and The Boston Consulting Group (BCG).The report highlights the emerging trends in employment generation and offers suggestions on how the country can prepare itself for creating new jobs in the paradigm of ‘new’ globalization. India is one of the fastest growing economies in the world. Over the last five years, it has posted an aver- age annual GDP growth of approximately 6.7 per cent against the global average of 2.7 per cent. Between 2004 and 2012, the period for which conclusive employ- ment data is available, average annual GDP growth was 8.1 per cent but job growth averaged only 2 per cent. India’s employment problem is further complicated by its demographic situation; it is at the cusp of realizing its demographic dividend. Approximately half of India’s 1.2 billion people are under the age of 26; by 2020, India is forecasted to be the youngest country in the world with a median age of 29. United Nations Development Program (UNDP) estimates that by 2040 India will have the maximum share of working-age population; and in 2050 it will have the maximum number of working- age people. This significant growth in the working-age population further underscores the need to create jobs. The magnitude of the problem can be explained as follows. Every year, 5-7 million young people join the workforce in India. In addition, 5 million people leave agriculture to join the non-agriculture sectors and 2-3 million educated, unemployed people look for jobs in the industry and services sectors. This is assuming that it takes 5 years for the presently 10 million unemployed people to find employment. Hence, we estimate a to- tal annual demand of 12-15 million non-agriculture jobs per annum. Against this, only about 8 million jobs have been added in these sectors every year from 2004-2005 to 2011-2012. Hence, there is a gap of 4-7 million jobs that needs to be filled. This gap is likely to widen in the fu- ture due to the growing number of young people enter-
  • 39. 37 SPECIAL FEATURE APRIL 2017 ing the labor force each year. Following are two reasons for high growth with low job creation in India: First, growth over the last two decades has been driven by capital investment rather than labor addition. This has resulted in an increase in the amount of capital available per worker, or ‘capital deepening’, leading to an increase in labor productivity rather than in the num- ber of jobs. Second, and related reason for low job creation is that the highest growth in gross value added (GVA) has been in industries that are less labor-intensive, across both manufacturing and services. Given that employment generation per unit of econom- ic growth in India is two-thirds that of the global aver- age, and recognizing the historic decline in the elasticity of job creation in the country, estimates suggest that we will need a growth rate of well above the 8 per cent target in order to generate these jobs under the current growth and job creation paradigm. In recent years, however, very few countries other than China, have achieved a sustained period of high growth and job creation. And with the emergence of a ‘new growth paradigm’ driven by the ‘new globalisation’ wherein many countries are prioritising the ‘inward look’ in their national policies, the task of achieving em- ployment – oriented growth becomes even more diffi- cult. India faces the following two challenges in achiev- ing high growth with job creation. • The first challenge is to adopt a set of strategies that will enable India to sustain a growth rate of 8 percent or higher in the ‘new’ global economic envi- ronment, which is characterized by low to medium global growth and the absence of the ‘trade multi- plier’. India has hitherto been following a model of development which encouraged a transition from agriculture to light manufacturing. This was sub- sequently followed by the development of heavy industry and then services. The model encouraged rapid growth of exports as well. This model, which was also sought to be emulated by countries like Vi- etnam, is being fundamentally disrupted today by the twin forces of growth in digital technologies, including manufacturing technologies collectively called Industry 4.0 and growing economic national- ism that puts a country’s perceived national inter- est above globally agreed rules and norms. These twin forces are leading to a new and radically different model of globalization where large-scale manufacturing and global merchandise exports are losing their primacy as drivers of growth and job creation in the medium to longer term (although they will continue to be relevant). Therefore, a strategy of growth and job creation, driven largely by growth of manufacturing and exports while lev- eraging labor cost competitiveness is unlikely to de- liver the desired results. In such a scenario, a new economic development paradigm, where in ser- vices trade accelerates and replaces the decline in merchandise trade should be considered to achieve growth with job creation. The second, and perhaps a more serious challenge faced by India is to ensure that the high growth rate is accompanied by high job creation. As has been elucidated earlier as well, India is currently witness- ing high growth but low job creation. Instead of growth being driven by an increase in ‘labor stock’ (i.e. more jobs being created) it has been driven by ‘capital deepening’ which has resulted in growth in high capital-intensive sectors as opposed to labor- intensive sectors, thereby creating fewer jobs. Go- ing forward, high growth alone, even if achieved, cannot be relied on to create jobs; and a targeted strategy of growth together with job creation needs to be devised. While the traditional model of globalization—and consequently the economic model of manufactur- ing and export-led growth—are being disrupted, a set of new opportunities are emerging from the growth of digital technologies. • The first opportunity arises from the trend of grow- ing ‘servitization’ of business. We are increasingly witnessing changing business models with growth of services consumption and trade, driven by a con- sumer need towards ‘solutions’ rather than simple product-related transactions. These value-added services or solutions also command higher margins for business. This growth in services can be seen, for example, in the rise of forward services in manu- facturing, like asset performance improvement and predictive maintenance services that leverage large
  • 40. 38 SPECIAL FEATURE ECONOMY MATTERS scale data generated by connected devices. This growing servitization is already being reflected in the changing consumption patterns of countries like India & China and in global trade. In India, the services sector has shown immense promise with a compound annual growth rate (CAGR) of 8.6 per cent (2010-2014), out performing others such as China (8.4 per cent) and the US (1.8 per cent). • The second and related, opportunity comes from the growth in platform players which is driving the growth and viability of new start-ups, individual en- trepreneurs, micro-entrepreneurs employing a few workers, self-contracted workers etc. These plat- forms provide the necessary ecosystem for micro entrepreneurs to operate in and they also eliminate the traditional need for small businesses to invest in full-scale supply chains to become competitive. Hence, they support an entire ecosystem of self- employment of ‘job creators’, rather than only ‘job seekers’. The global and local challenges to growth and jobs on one hand, and the new opportunities presented by ser- vitization and the growth in platform players enabled by newer digital technologies on the other, strongly point to the need for a new economic development paradigm for India around three pillars: • Domestic demand will have to be the primary driver of growth (although exports, especially in services, will continue to contribute to GDP growth). • Services will provide a strong opportunity for both domestic and export growth; even more so for job creation as manufacturing will become increasingly capital or automation intensive. • Micro entrepreneurs will play a bigger role in driv- ing growth and job creation, alongside larger enter- prises. The Indian Government has already launched major pol- icy initiatives, such as Ease of Doing Business, Digital In- dia, and Startup India, to lay a strong foundation for this new economic development paradigm. What is needed is a concerted, focused implementation of these poli- cies as well as a special focus on ‘activating’ four key leverage points, described below, which are critical to the success of the new paradigm of growth and jobs. 1. Risk and growth capital for micro entrepreneurs has to be scaled up rapidly, along with the rules and mechanisms for easy access to them. 2. The learning and skilling ecosystem has to move towards a ‘life-long learning system’ as new kinds of jobs emerge with very different skill profiles. This will ensure that the appropriate skills are provided to enable employment in the new development paradigm and there is a continuous mechanism in place to update these skills as required. 3. Finally, labor norms need to be revisited to ensure that they also cater to and support the new types of workers and their employers who will drive growth in this new paradigm.